These synopses are intended only as aids to the reader in

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Text

Bulletin No. 1998–8

February 23, 1998

Internal Revenue

bulletin

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

ADMINISTRATIVE

T.D. 8750, page 4.

REG–115795–97, page 33.

REG–100841–97, page 30.

Temporary and proposed regulations provide guidance to a

passive foreign investment company (PFIC) shareholder that

makes the election under section 1295 of the Code to treat

the PFIC as a qualified electing fund. A public hearing on the

proposed regulations will be held on April 16, 1998.

Rev. Proc. 98–21, page 27.

Procedures concerning requests to the U.S. competent authority for assistance in resolving cases under Article XIII(8)

of the U.S.—Canada Income Tax Convention are set forth.

EMPLOYEE PLANS

REG–209476–82, page 36.

Proposed regulations under section 72(p) of the Code relate

to loans made from a qualified employer plan to plan participants or beneficiaries.

EXEMPT ORGANIZATIONS

Announcement 98–11, page 42.

A list is given of organizations now classified as private foundations.

EMPLOYMENT TAX

REG–209484–87; REG–209807–95, page 40.

Proposed regulations under sections 3121(v)(2) and

3306(r)(2) of the Code relate to when amounts deferred

under or paid from certain nonqualified deferred compensation plans are taken into account as “wages” for purposes of

the taxes imposed by FICA and FUTA.

EXCISE TAX

T.D. 8748, page 24.

Proposed regulations under section 6159 of the Code relate

to terminations of agreements for the payment of tax liabilities in installments (installment agreements).

REG–105163–97, page 31.

Proposed regulations relate to the treatment of certain investment income under the qualifying income provisions of

section 7704(d) of the Code and the application of the passive activity loss rules to publicly traded partnerships. A public hearing will be held on April 28, 1998.

Notice 98–14, page 27.

Failure to deposit federal tax; penalty abatement. An

interim procedure is provided for use by taxpayers to request abatement of the failure-to-deposit penalty when the

manner in which the Service applies deposits produces multiple failure-to-deposit penalties as a result of a single failure

to deposit.

Announcement 98–12, page 43.

This announcement provides guidance on how to complete

the worksheets for Form 8582, Passive Activity Loss Limitations, if the filer has more than one passive activity with

Schedule D (Form 1040) transactions.

Announcement 98–13, page 43.

Form 3115, Application for Change in Accounting Method,

and its instructions have been revised.

Announcement 98–14, page 44.

Form 5305–R, Roth Individual Retirement Trust Account;

Form 5305–RA, Roth Individual Retirement Custodial Account; Form 5305–E, Education Individual Retirement Trust

Account; and Form 5305–EA, Education Individual Retirement Custodial Account, are now available.

Final regulations under section 4081 of the Code relate to the

application of the diesel fuel excise tax to fuel used in Alaska.

Finding Lists begin on page 48.

Announcement of Disbarments and Suspensions begins on page 45.

Department of the Treasury

Internal Revenue Service

Mission of the Service

ucts and services; and perform in a manner warranting

the highest degree of public confidence in our integrity, efficiency, and fairness.

The purpose of the Internal Revenue Service is to collect

the proper amount of tax revenue at the least cost; serve

the public by continually improving the quality of our prod-

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that

care be exercised not to raise an issue or to ask a court to

adopt a position inconsistent with an established Service

position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue

is determined by Congress.

With this in mind, it is the duty of the Service to carry out that

policy by correctly applying the laws enacted by Congress;

to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;

and to perform this work in a fair and impartial manner, with

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax devices and

fraud.

At the heart of administration is interpretation of the Code. It

is the responsibility of each person in the Service, charged

with the duty of interpreting the law, to try to find the true

meaning of the statutory provision and not to adopt a

strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only

when we ascertain and apply the true meaning of the statute.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold

on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings

are issued by the Department of the Treasury’s Office of the

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

the application of the law to the pivotal facts stated in the

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

will not be relied on, used, or cited as precedents by Service

personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a semiannual basis

and are published in the first Bulletin of the succeeding semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 1295.—Qualified

Electing Fund

26 CFR 1.1295–1T: Qualified electing funds

(temporary).

T.D. 8750

1.1293–1T(c)(3), 1.1295–1T(k), 1.1295–

3T(h), and § 1.1297–3T(c)(3) of these

regulations.

FOR FURTHER INFORMATION CONTACT: Gayle Novig, (202) 622-3840

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

General Rules for Making and

Maintaining Qualified Electing

Fund Elections

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Temporary and final regulations.

SUMMARY: This document contains

temporary regulations that provide guidance to a passive foreign investment company (PFIC) shareholder that makes the

election under section 1295 (section 1295

election) to treat the PFIC as a qualified

electing fund (QEF). This document also

contains temporary regulations that provide guidance for shareholders that wish

to make a section 1295 election that will

apply on a retroactive basis (retroactive

election). In addition, this document contains a temporary regulation that provides

guidance under section 1291 to a PFIC

shareholder that is a tax-exempt organization. Temporary regulations are needed to

provide taxpayers additional time to satisfy certain requirements to make the section 1295 election. The text of these temporary regulations also serves as the text

of proposed regulations REG–115795–

97, page 33. In addition, this document

removes § 1.1291–9(i)(1) of the final regulations, and amends § 1.1297– 3T. References to sections 1296 and 1297 in this

document are references to sections 1296

and 1297 as in effect before the effective

date of section 1122(a) of the Tax Relief

Act of 1997.

DATES: These regulations are effective

January 2, 1998.

For dates of applicability, see

§§ 1.1291–1T(e)(2), 1.1293–1T(a)(2)(ii),

February 23, 1998

Paperwork Reduction Act

These regulations are being issued

without prior notice and public procedure

pursuant to the Administrative Procedure

Act (5 U.S.C. 553). For this reason, the

collections of information contained in

these regulations have been reviewed and,

pending receipt and evaluation of public

comments, approved by the Office of

Management and Budget under control

number 1545–1555. Responses to these

collections of information are mandatory.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless the collection of information displays a valid

control number.

For further information concerning

these collections of information, and

where to submit comments on the collections of information and the accuracy of

the estimated burden, and suggestions for

reducing this burden, please refer to the

preamble to REG–115795–97.

Books or records relating to a collection of information must be retained as

long as their contents may become material in the administration of any internal

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

This document contains amendments to

the Income Tax Regulations (26 CFR part

1) under sections 1291, 1293, 1295, and

1297 of the Internal Revenue Code. Sections 1291, 1293, 1295, and 1297 were

added by the Tax Reform Act of 1986, effective for taxable years of foreign corporations beginning after December 31,

1986. As originally enacted, the section

1295 election was an election made by the

PFIC. The Technical and Miscellaneous

Revenue Act of 1988 (TAMRA) amended

section 1295, effective for taxable years

of foreign corporations beginning after

December 31, 1986, to change the section

1295 election to a shareholder-by-shareholder election. Sections 1291, 1293, and

1297 also were amended by TAMRA;

sections 1293 and 1297 were further

amended by the Omnibus Budget Reconciliation Act of 1993. Section 1297 also

was amended by the Revenue Reconciliation Act of 1989 and the Small Business

Job Protection Act of 1996. In addition,

the Taxpayer Relief Act of 1997 (1997

TRA) amended section 1 to provide categories of long-term capital gain and the

maximum rates of tax to which the categories are subject. In certain cases, this

amendment affects the calculation of net

capital gain for purposes of section 1293.

Guidance for making the election under

section 1295 was first provided on March

2, 1988, in the Federal Register (53 F.R.

6770), with the publication of temporary

regulations (T.D. 8178) relating to the

section 1295 election. These temporary

regulations provided guidance to PFICs

making the section 1295 election and

therefore became obsolete with the 1988

amendment to section 1295. The Internal

Revenue Service published Notice 88–

125, 1988–2 C.B. 535, to provide guidance to shareholders making the section

1295 election under section 1295, as

amended. Notice 88–125 was an administrative pronouncement, as that term is

used in § 1.6661–3(b)(2) of the Income

Tax Regulations, and taxpayers could rely

on Notice 88–125 to the same extent as a

revenue ruling or a revenue procedure.

Notice 88–125 stated that taxpayers could

rely on the notice until regulations were

published, and that those regulations

would be effective for taxable years beginning after December 31, 1986.

Proposed regulations published April 1,

1992 (57 F.R. 11024), provide a general

rule regarding the application of section

1291 to a PFIC shareholder that is an organization exempt from tax under chapter

1. In addition, these proposed regulations

provide general rules regarding the application of section 1293 and special rules

regarding the application of section 1295,

including rules with respect to transfers of

PFIC stock subject to a section 1295 election. Proposed regulation § 1.1295–2,

published December 24, 1996 (61 F.R.

1998–8 I.R.B.

67752), permits certain shareholders to

make a special section 1295 election with

respect to certain preferred stock. Proposed regulation § 1.1293–2, also published December 24, 1996 (61 F.R.

67752), provides the special inclusion

rules applicable to shareholders that make

the special section 1295 election with respect to their preferred stock.

Temporary regulations § 1.1297–3T,

published March 2, 1988 (53 F.R. 6770),

provides guidance for making the deemed

sale election under section 1297(b)(1) to

purge the PFIC taint from stock of a foreign corporation that is treated as stock of

a PFIC under section 1297(b)(1). Section

1.1291–9(i)(1) of the regulations, published December 27, 1996 (61 F.R.

68149), provides that the deemed dividend election rules of § 1.1291–9 do not

apply to elections made under section

1297(b)(1). A similar rule had been provided in temporary regulations published

April 1, 1992 (57 F.R. 10992). The temporary regulations, which had been effective April 1, 1992, sunset April 1, 1995.

Treasury and the Service believe that

immediate guidance in the form of temporary regulations regarding the section

1295 election is necessary. First, the regulations provide significant new QEF

election procedures that are beneficial to

taxpayers. For example, the regulations

provide procedures for both retroactive

and protective elections. The benefits

provided by these changes may be jeopardized, or simply unavailable (as a result

of closed taxable years), if taxpayers cannot immediately rely on them. Second,

although the regulations embody guidance already provided in Notice 88–125,

the regulations significantly reduce the

burden for making and maintaining the

election and clarify, most often in favor of

taxpayers, significant ambiguities left by

the Notice. Treasury and the Service believe that the benefits of immediate guidance significantly outweigh any advantage obtained by issuing the regulations in

proposed form only because these temporary regulations prevent prejudice to taxpayers as a consequence of a further delay

in guidance and because they benefit taxpayers by providing additional time to

make certain elections. Finally, the temporary regulations provide guidance concerning the manner in which section 1(h),

which was added to the Code by 1997

1998–8 I.R.B

TRA, effective for taxable years ending

after May 6, 1997, applies to determine

the net capital gain of the PFIC and the

QEF shareholder’s pro rata share of the

net capital gain. Therefore, it would be

impractical and contrary to public interest

to issue this Treasury decision with prior

notice under section 553(b) of title 5 of

the United States Code.

Explanation of Provisions

A foreign corporation is a passive foreign investment company (PFIC) for a

taxable year if the foreign corporation satisfies either the income or asset test of

section 1296(a) for that year. A foreign

corporation is a PFIC under the income

test if 75 percent or more of its gross income for its taxable year is passive, or investment-type, income. Alternatively,

under the asset test, a foreign corporation

is a PFIC if 50 percent or more of the average fair market value of its assets during

its taxable year are assets that produce or

are held for the production of passive income. A shareholder of a foreign corporation that qualifies as a PFIC is subject to

the interest charge regime of section 1291

with respect to certain distributions by the

PFIC and certain dispositions of its stock.

Generally, a shareholder may avoid the

interest charge regime by making a timely

election under section 1295 to treat a

PFIC as a QEF, in which case the shareholder will be taxable annually under section 1293 on its pro rata shares of the ordinary earnings and net capital gain of the

PFIC. Under section 1295(a), a section

1295 election will apply with respect to

the PFIC if the PFIC complies with requirements prescribed by the Secretary

for purposes of determining the ordinary

earnings and net capital gain of the PFIC

and otherwise carrying out the purposes

of the PFIC provisions.

Section 1295(b)(1) provides that a

shareholder may make a section 1295

election with respect to a PFIC for any

taxable year of the shareholder (shareholder election year). Once made, the

election will apply to that year and to all

subsequent years of the shareholder unless revoked with the consent of the Secretary. Section 1295(b)(2) prescribes the

time for making the election. In general,

for the section 1295 election to be applicable to a taxable year, the shareholder

must make the election by the due date, as

extended under section 6081, for the

shareholder’s return for that taxable year.

However, to the extent provided in regulations, a section 1295 election may be

made for a taxable year after the time required if the shareholder failed to make a

timely election because the shareholder

reasonably believed that the foreign corporation was not a PFIC.

This document provides temporary regulations that interpret sections 1291,

1293, 1295, and 1297. In particular, the

temporary regulations incorporate the

rules of Notice 88–125, with certain modifications. The temporary regulations also

clarify the rules of the notice and proposed regulation § 1.1295–1(b) with respect to the application of section 1295 to

options, lapse of PFIC status, cessation of

ownership of PFIC stock, transfer of

stock subject to a section 1295 election to

a pass through entity, and tax-exempt organizations. The temporary regulations

also provide rules regarding invalidation,

termination and revocation of a section

1295 election. In addition, the temporary

regulations introduce rules for making a

retroactive election. Finally, the temporary regulations provide guidance concerning the application of the deemed dividend election rules to elections under

section 1297(b)(1).

1. Rules of Notice 88–125.

Temporary regulation § 1.1295–1T(c)

through (g) adopts the rules provided in

Notice 88–125, with certain modifications. These modifications reflect certain

comments received with respect to the notice.

Notice 88–125 describes the requirements a shareholder must satisfy to make

and maintain a section 1295 election. In

particular, each year the shareholder must

file Form 8621 with its income tax return

and attach a PFIC Annual Information

Statement (described below). In the year

of election, the shareholder also must attach a Shareholder Election Statement.

Notice 88–125 requires satisfaction of the

election and annual reporting requirements with respect to each PFIC for

which the shareholder makes the section

1295 election.

Commenters indicated that these election and annual reporting requirements

February 23, 1998

are burdensome, especially if the shareholder is making the election with respect

to many foreign corporations. In response

to the comments, the temporary regulations change these requirements to reduce

the burden on the electing shareholder.

First, the temporary regulations eliminate

the need to file a Shareholder Election

Statement. Second, the temporary regulations eliminate the need to file a copy of

the PFIC Annual Information Statement

with Form 8621 and require instead that

the shareholder retain a copy of the PFIC

Annual Information Statement for production upon examination by the Service.

Thus, to make and maintain a section 1295

election, the shareholder need only file

Form 8621 for each PFIC on an annual

basis and maintain records to support the

information entered on that form.

Notice 88–125 imposes certain requirements on PFICs and on intermediaries

through which shareholders own PFIC

stock. The notice requires a PFIC to provide its shareholders with a PFIC Annual

Information Statement containing information necessary to determine each

shareholder’s yearly income inclusion. In

the case of indirect ownership of PFIC

stock, a nominee or shareholder of record

that has received a PFIC Annual Information Statement may issue its own statement to the shareholder containing the

relevant information in lieu of passing on

the PFIC Annual Information Statement.

The temporary regulations allow PFICs

and intermediaries more flexibility in fulfilling these requirements. A PFIC that

owns directly or indirectly any shares of

one or more PFICs may provide its shareholders with a PFIC Annual Information

Statement in which it combines the required information and representations of

the PFIC and any lower tier PFICs. The

PFIC may use any format for a combined

PFIC Annual Information Statement provided the required information and representations are clearly presented and identified with the respective corporations.

Similarly, an intermediary through which

a shareholder indirectly holds stock in

more than one PFIC may provide the

shareholder a combined statement based

on multiple PFIC Annual Information

Statements. Comments are requested

concerning alternative reporting methods

that could further reduce the burden on

electing shareholders.

February 23, 1998

As provided in Notice 88–125, the

PFIC Annual Information Statement must

include the shareholder’s pro rata shares

of the ordinary earnings and net capital

gain of the PFIC for the PFIC’s taxable

year or information that will enable the

shareholder to calculate its pro rata

shares. In addition, the PFIC Annual Information Statement must contain information about distributions to shareholders

and a statement that the PFIC will permit

the shareholder to inspect and copy its

permanent books of account, records, and

other documents of the PFIC necessary to

determine that the ordinary earnings and

net capital gain of the PFIC have been

calculated according to federal income

tax accounting principles. Commenters

indicated that it was unclear in the notice

whether a shareholder, rather than the

PFIC, could calculate the requisite federal

income tax information with respect to a

PFIC that did not keep its books and

records according to U.S. tax accounting

rules. In response to the comments, the

temporary regulations clarify that a shareholder may obtain the books, records and

other documents of the foreign corporation necessary for the shareholder to determine the correct earnings and profits

and net capital gain of the PFIC according

to federal income tax principles and calculate the shareholder’s pro rata shares of

the PFIC’s ordinary earnings and net capital gain. The temporary regulations provide that, in that case, the PFIC must include a statement in its PFIC Annual

Information Statement that it has permitted the shareholder to examine the PFIC’s

books of account, records, and other documents necessary for the shareholder to

calculate the amounts of ordinary earnings and net capital gain.

Notice 88–125 provides that a domestic

partnership makes the section 1295 election rather than each individual partner

that is an indirect shareholder of the PFIC

by reason of the partner’s interest in the

partnership. The notice also provides that

an S corporation makes the section 1295

election. This entity-level election in the

case of domestic partnerships and S corporations reflects the view that multiple

elections by the partners or S corporation

shareholders would be more burdensome

than the single entity-level election. The

temporary regulations adopt the rules of

the notice with respect to elections by do-

mestic pass through entities, clarifying

that the section 1295 election with respect

to stock owned directly or indirectly by a

domestic trust or estate generally is also

made at the entity level. The temporary

regulations also adopt the rules of the notice with respect to interests held by foreign pass through entities. Interest holders in foreign partnerships, trusts, and

estates must make the section 1295 election with respect to their indirect interests

in PFICs held through those entities; foreign entities may not make the section

1295 election.

Partnerships, S corporations, trusts, and

estates are referred to as pass through entities in the temporary regulations. The

regulations clarify that an election made

by a domestic pass through entity is made

in the pass through entity’s capacity as a

shareholder, as specially defined in temporary regulation § 1.1295–1T(j) for purposes of the section 1295 election provisions. Thus, the domestic pass through

entity takes the section 1293 inclusion

into account in its return for the year in

which or with which the PFIC’s taxable

year ends, and the interest holders in the

pass through entity take the section 1293

inclusion into account under the rules applicable to inclusions of income from the

pass through entity. In addition, the temporary regulations clarify that if an interest holder in a domestic pass through entity transfers stock of a PFIC subject to a

section 1295 election to the pass through

entity, the section 1295 election continues

to apply to the interest holder whether or

not the pass through entity makes the section 1295 election.

Similarly, the temporary regulations

clarify the effect of the termination under

section 708(b) of a partnership on a section 1295 election made by the partnership. Section 1.1295–1T(b)(3)(iii) provides that, notwithstanding the

termination of a section 1295 election

when a partnership terminates, the partners of the former partnership that are

partners of the new partnership are bound

by the section 1295 election made by the

former partnership whether or not the new

partnership makes a section 1295 election.

Notice 88–125 does not provide any

special rules concerning tax-exempt entities. As provided in proposed regulations

under section 1291 (see Regulation Project INTL–656–87, published at 1992–1

1998–8 I.R.B.

C.B. 1124), section 1291 and the regulations under section 1291 apply to a taxexempt organization that is a shareholder

of a PFIC that is not a pedigreed QEF,

within the meaning of §1.1291–9(j)(2)(ii),

only if a dividend from the PFIC would

be taxable to the organization under subchapter F. Section 1.1291–1T(e) of these

temporary regulations provides the same

rule. To prevent such a tax-exempt organization from being subject to an unnecessary section 1295 election that may

have adverse consequences to the tax-exempt entity (e.g., an excise tax on gross

investment income of a private foundation that arises as a consequence of a section 1295 election), the temporary regulations provide a rule that precludes a

tax-exempt entity that is not taxable with

respect to dividends from a PFIC from

making a section 1295 election with respect to that PFIC or from being subject

to a pass through entity level election.

Commenters indicated that Notice

88–125 is unclear about which taxable

year of the PFIC is the first taxable year to

which the section 1295 election applies.

Temporary regulation § 1.1295–1T(c)(2)

clarifies that the section 1295 election is

effective with respect to the taxable year

of the foreign corporation that ends during

the shareholder’s election year. Because

certain shareholders may have misinterpreted Notice 88–125, the Commissioner

will respect a section 1295 election made

prior to February 1, 1998, that was intended to be effective for the taxable year

of the PFIC that began during the shareholder’s election year provided that it is

clear from all the facts and circumstances

that the shareholder intended the election

to be effective for that taxable year of the

foreign corporation. For example, a calendar year shareholder that made the section

1295 election in its 1995 return with respect to a foreign corporation whose taxable year began in 1995 and ended in

1996, with the intention that the election

first apply to the foreign corporation’s taxable year ended in 1996, will be treated as

having made a valid section 1295 election

with respect to that year.

2. Additional Clarifications.

A. Options.

Options with respect to PFIC stock present unique problems under section 1295.

1998–8 I.R.B

Section 1297(a)(4) provides that, under

regulations, an option to acquire stock

may be treated as ownership of stock.

Proposed regulations under section

1291 (see Regulation Project INTL–656–

87, published in 1992–1 C.B. 1124) provide that options are treated like stock for

purposes of section 1291. Under proposed

regulation § 1.1291–1(d), an option is

considered to be stock of a PFIC that is

not a pedigreed QEF for purposes of applying section 1291 to a disposition of the

option, unless the holder of the actual

stock which is subject to the option is currently including income from the stock

under section 1293. Under proposed regulation § 1.1291–1(h)(3), the holding period of stock acquired upon exercise of an

option treated as stock under § 1.1291–

1(d) includes the period the option was

held. These rules recognize that the value

of an option is linked to the value of the

underlying stock and therefore such an option should be subject to the PFIC rules.

Because of the potential for application

of section 1291 to options or stock acquired upon exercise of options, some option holders have requested that regulations provide rules for making a section

1295 election with respect to an option.

Application of a section 1295 election and

the section 1293 current inclusion regime

to options would present serious computational issues and would be administratively burdensome. Therefore, the temporary regulations continue the rule that any

shareholder’s section 1295 election with

respect to stock of a PFIC does not apply

to options to acquire stock of the PFIC

and that an option holder may not make a

section 1295 election with respect to the

optioned stock. Accordingly, if a shareholder of stock subject to a section 1295

election exercises an option to purchase

additional shares of stock of that PFIC,

the stock received will be subject to the

section 1295 election made by the shareholder, but, because of the rules of proposed regulation § 1.1291–1(h)(3), the

stock may be treated as stock of an unpedigreed QEF.

Comments are requested concerning

the option rule. In particular, comments

are requested that identify any administratively feasible mechanisms that would

permit a shareholder to make a section

1295 election that will apply to options.

B. Section 1295 Election Made in a

Joint Return.

Section 1.1295–1T(b)(4) of the temporary regulations clarifies the application

of a section 1295 election made in a joint

return within the meaning of section

6013. The temporary regulations provide

that a section 1295 election made in a

joint return will be treated as having been

made by both spouses that join in the filing of that return.

C. Lapse in PFIC Status or in

Ownership.

Section 1.1295–1T(c)(2) of the temporary regulations clarifies the status of a

shareholder’s section 1295 election with

respect to a foreign corporation after the

foreign corporation ceases to be a PFIC

and a QEF, or after the shareholder ceases

to be a shareholder of the PFIC. In general, once a section 1295 election is made

with respect to a corporation, it remains in

effect, although not applicable, during

those years that the foreign corporation is

not a PFIC. Therefore, if the corporation

requalifies as a PFIC, the section 1295

election previously made is still valid, and

the shareholder is required to satisfy the

requirements of that election. Furthermore, as indicated in H.R. No. 795, 100th

Cong., 2d Sess., at 567 (1988), an election

remains in effect with respect to a shareholder, although dormant, after a shareholder disposes of its entire interest in the

PFIC. Upon the shareholder’s reacquisition of an interest in the PFIC, the section

1295 election will apply to the newly acquired stock.

D. Invalidation, Termination, and

Revocation of Section 1295

Elections.

As provided in temporary regulation

§ 1.1295–1T(i)(1), the Commissioner has

discretion to invalidate or terminate a section 1295 election if the shareholder or

the QEF fails to satisfy the section 1295

election requirements. However, intentional failure to satisfy the section 1295

election requirements will not automatically result in invalidation or termination.

If the Commissioner invalidates a section

1295 election, the shareholder will be

treated as if it never made a section 1295

election with respect to the PFIC. If the

Commissioner terminates a section 1295

election for a taxable year, the section

February 23, 1998

1295 election will be valid for all taxable

years before that year, but inapplicable to

that year and all subsequent taxable years.

Once a shareholder makes a section

1295 election, the shareholder may revoke its section 1295 election only with

the consent of the Commissioner. Temporary regulation § 1.1295–1T(i)(2) provides the rules for requesting consent to

revoke an election.

The effects of an invalidation, termination, or revocation of a section 1295 election are provided in § 1.1295–1T(i)(3) of

the temporary regulations. In the Commissioner’s discretion, stock of a foreign

corporation, with respect to which the section 1295 election is invalidated, terminated, or revoked will be treated as sold as

of the last day of the PFIC’s last taxable

year as a QEF. The Commissioner also

has the discretion to impose any other

terms and conditions that the Commissioner deems necessary to ensure a shareholder’s compliance with sections 1291

through 1297. In addition, revocation will

terminate all section 1294 elections.

Section 1.1295–1T(i)(4) of the temporary regulations permits a shareholder to

make another section 1295 election with

respect to the PFIC after the fifth taxable

year following the invalidation, termination, or revocation. However, the shareholder may request consent to make the

section 1295 election for an earlier taxable year.

3. Section 1293.

The temporary regulations provide

guidance to PFICs concerning the application of section 1(h) to section 1293 and

the calculation of net capital gain. Section 1.1293–1T(a)(2) of the temporary

regulations provides three alternatives for

a QEF to calculate and report net capital

gain. First, the PFIC may calculate and

report to its shareholders the amount of

each category of long-term capital gain

provided in section 1(h). Alternatively,

the PFIC may determine and report a single amount of net capital gain, stating that

that amount of long-term capital gain is

subject to the highest capital gain rate of

tax applicable to the shareholder. Under

the third option, the PFIC may treat the

total of its earnings and profits for the taxable year as ordinary earnings. The provision of these options is intended to simplify compliance with the requirements of

February 23, 1998

sections 1293 and 1295. It is anticipated

that, without providing these options,

some PFICs would not be willing or able

to calculate the categories of net capital

gain required by section 1(h) and therefore would not provide the information

necessary for a QEF shareholder to maintain a valid section 1295 election. A

shareholder that has access to information

necessary to calculate its pro rata share of

the PFIC’s ordinary earnings and net capital gain may also use any of these options.

The Service requests comments about

how net capital gain should be calculated,

especially in light of the 1997 Act

changes to section 1.

The temporary regulations under section 1293 also clarify the application of

the current inclusion rules of section 1293

to interests in a QEF held through a domestic pass through entity. The temporary regulations provide generally that a

U.S. person that is a shareholder of the

QEF by reason of an interest in a domestic pass through entity takes into account

its pro rata shares of the ordinary earnings

and net capital gain of the QEF attributable to the QEF shares held by the pass

through entity according to the general

rules applicable to inclusions of income

from the pass through entity.

§ 1.1295–1T(c) through (j) will apply to

taxable years of shareholders beginning

after December 31, 1997. As provided in

§ 1.1295–1T(h), the Internal Revenue

Service will honor taxpayer reliance on

Notice 88–125 for taxable years beginning after December 31, 1986, and before

January 1, 1998. Thus, if a person made a

valid section 1295 election under the rules

of Notice 88–125 for taxable years beginning before January 1, 1998, and, for

those taxable years, complied with the

rules of the notice relating to maintaining

that election, the election remains in effect for taxable years beginning after December 31, 1997. However, elections

made under Notice 88–125, as well as

elections made under these temporary

regulations, must be maintained as provided in the temporary regulations.

Temporary regulation § 1.1291–1T(e)

will apply on and after April 1, 1992.

Section 1.1293–1T(a)(2) of the temporary

regulations will apply to sales by QEFs

during their taxable years ending on or

after May 7, 1997. Temporary regulation

§§ 1.1293–1T(c) and 1.1295–1T(b)(2)(iii), (b)(3), and (b)(4) will apply to taxable years of shareholders beginning after

December 31, 1997.

6. Retroactive Section 1295 Elections.

4. Exempt organizations subject to

section 1291.

As stated above, the temporary regulations include the rule of proposed regulation § 1.1291–1(e). Under temporary regulation § 1.1291–1T(e), if the shareholder

of a PFIC is an organization exempt from

tax under this chapter (including an Individual Retirement Account (IRA)), section 1291 and these regulations apply to

such shareholder only if a dividend from

the PFIC would be taxable to the organization under subchapter F.

5. Effective Dates of Temporary

Regulations §§ 1.1291–1T(e),

1.1293–1T(a)(2), 1.1293–1T(c) and

1.1295–1T.

As stated above, Notice 88–125 provides that the notice’s rules will be provided in regulations applicable to taxable

years beginning after 1986. However, because the temporary regulations do not

adopt the rules of Notice 88–125 in their

entirety, the temporary regulations will

not be retroactively applied. Therefore,

a. In General.

Section 1295(b)(2) provides that, to the

extent provided in regulations, a shareholder may make a section 1295 election

with respect to a foreign corporation later

than the election due date if the shareholder failed to make a timely section

1295 election because the shareholder

reasonably believed that the foreign corporation was not a PFIC. In temporary

regulation § 1.1295–3T, Treasury and the

Service interpret section 1295(b)(2) to

permit a shareholder of a PFIC to make a

retroactive election in certain limited circumstances where the shareholder possessed reasonable belief that the corporation was not a PFIC or the shareholder

demonstrates that it reasonably relied on

the advice of a qualified tax professional.

As described below, the temporary regulations set forth two distinct sets of rules

for making a retroactive election. Under

the first set of rules, a shareholder of a

PFIC that meets certain conditions may

make a retroactive election without obtaining the consent of the Commissioner

1998–8 I.R.B.

(protective regime). A shareholder may

make a retroactive election under the protective regime only if the shareholder possessed reasonable belief as of the election

due date that the foreign corporation was

not a PFIC. A shareholder of a PFIC may

make a retroactive election under the protective regime even after the issue of

PFIC status has been raised in an audit by

the Service.

Under the second set of rules, a shareholder may make a retroactive election

only after obtaining the Commissioner’s

consent (consent regime). To make a

retroactive election under the consent

regime, the shareholder must demonstrate, to the satisfaction of the Commissioner, that the shareholder’s failure to

make a timely section 1295 election resulted from the shareholder’s reasonable

reliance on the advice of a qualified tax

professional. A shareholder of a PFIC

may not make a retroactive election under

the consent regime unless the shareholder

files a request for consent before the issue

of PFIC status is raised on audit.

The temporary regulations provide the

exclusive rules for making a retroactive

election. Thus, a shareholder that does

not satisfy the requirements of the temporary regulations may not seek relief under

any other provision of the law, including

§ 301.9100 regulations. Although such a

shareholder may not make a retroactive

election, the shareholder may be able to

attain certain benefits associated with a

retroactive election by making a section

1295 election for the current year together

with a purging election under section

1291(d)(2).

b. Protective Regime.

A shareholder that satisfies the requirements of the protective regime may make

a retroactive election under the rules of

temporary regulation § 1.1295–3T(c)

through (e) without obtaining the Commissioner’s consent. This regime requires

that the shareholder possess reasonable

belief, contemporaneous with the election

due date, that the foreign corporation was

not a PFIC.

The legislative history of section 1295

suggests that in certain circumstances a

shareholder that reasonably believed that

a foreign corporation was not a PFIC for a

taxable year (e.g., based on a reasonable

valuation of the corporation’s assets) may

1998–8 I.R.B

make a retroactive election if the Service

determines, upon examination, that the

corporation was in fact a PFIC for such

taxable year (e.g., based on the Service’s

valuation of the corporation’s assets for

the taxable year). Consistent with the legislative history, temporary regulation

§ 1.1295–3T(c) through (e) permits a

shareholder to make a retroactive election

for a taxable year of the shareholder

(retroactive election year), even if the

Service raises the PFIC status of the corporation upon audit. Although the shareholder need not request the Service’s consent to make a retroactive election under

this regime, the shareholder must satisfy

certain conditions to make a retroactive

election.

First, except for certain small shareholders, the shareholder must be able to

establish that the shareholder reasonably

believed, within the meaning of temporary regulation § 1.1295–3T(d), as of the

election due date, that the foreign corporation was not a PFIC. Temporary regulation § 1.1295–3T(d) interprets the reasonable belief standard to require an actual

determination by the shareholder, based

on a good faith application of the law, that

a foreign corporation was not a PFIC.

Therefore, to satisfy the reasonable belief

requirement, the shareholder must know

and understand the PFIC provisions, and

must make a good faith effort to apply the

income and asset tests of section 1296 to

determine whether the foreign corporation is a PFIC.

Except for certain small shareholders, a

shareholder must file a single Protective

Statement pursuant to temporary regulation § 1.1295–3T(c) that applies to a taxable year to preserve the shareholder’s

ability to make a retroactive election with

respect to such taxable year of the shareholder and subsequent taxable years. The

Protective Statement must contain information describing the basis for the shareholder’s conclusion as of the election due

date that the foreign corporation was not a

PFIC for its taxable year that ended in the

first taxable year of the shareholder for

which the Protective Statement applies.

As part of the Protective Statement, the

shareholder must extend the periods of

limitations for the assessment of taxes determined under sections 1291 through

1297 (PFIC related taxes) for all taxable

years to which the Protective Statement

will apply, as provided in § 1.1295–

3T(c)(4) of the temporary regulations.

The shareholder also must include certain

additional information in the Protective

Statement. A special transition rule permits shareholders to use the protective

regime for taxable years ending prior to

January 2, 1998, provided the periods of

limitations on the assessment of taxes for

such years have not expired.

Temporary regulation § 1.1295–3T(e)

provides special rules for certain small

shareholders. A shareholder that qualifies

under § 1.1295–3T(e) for a taxable year

will not be required to satisfy the reasonable belief requirement or file a Protective

Statement to preserve the shareholder’s

ability to make a retroactive election with

respect to such year (a qualified shareholder).

Except as provided below, a shareholder is a qualified shareholder only if

the shareholder owns, directly, indirectly

or constructively, less than two percent of

the vote and value of each class of stock

of the foreign corporation during such

year, and has not filed a Protective Statement that applies to an earlier year included in the shareholder’s holding period

of stock of the foreign corporation. In

addition, for the special rule to apply to a

taxable year of the shareholder, the foreign corporation or its U.S. counsel must

have indicated in a corporate filing, shareholder mailing or similar document that

the foreign corporation reasonably believed that it was not a PFIC for the taxable year of the foreign corporation that

ended with or within such taxable year of

the shareholder. However, no shareholder

will be a qualified shareholder if the

shareholder knew that the corporation

was in fact a PFIC or knew or had reason

to know that a corporate filing relating to

the corporation’s PFIC status was inaccurate. For this purpose, a shareholder will

be treated as knowing that the corporation

was in fact a PFIC if the principal activity

of the foreign corporation is owning or

trading a diversified portfolio of stock, securities, or other financial contracts. A

qualified shareholder that makes a valid

retroactive election in its earliest open

taxable year in which the foreign corporation is a PFIC may, subject to certain conditions, be treated as a shareholder of a

pedigreed QEF even if the period of limitations for the assessment of taxes for an

February 23, 1998

earlier taxable year in which the corporation qualified as a PFIC has expired.

c. Consent Regime.

Certain taxpayers have urged the Service to interpret the reasonable belief requirement of section 1295(b)(2) to allow

a shareholder to make a retroactive election if the shareholder or its tax adviser

did not know or properly apply the PFIC

rules. In particular, certain taxpayers

have recommended adoption of the reasonable action and good faith standard of

§ 301.9100 regulations for demonstrating

reasonable belief.

Treasury and the Service recognize that

the PFIC rules are complex and, in some

cases, difficult for shareholders to apply.

Accordingly, the temporary regulations

provide that, in certain limited circumstances, a shareholder may obtain the

Commissioner ’s consent to make a

retroactive election, even if the shareholder failed to know or properly apply

the PFIC rules in the earlier year. Under

temporary regulation § 1.1295–3T(f), a

shareholder that reasonably relied on the

advice of a qualified tax professional may

request consent to make a retroactive

election.

In response to taxpayer comments,

Treasury and the Service have incorporated into the consent regime certain rules

set forth in § 301.9100 regulations. As

described below, temporary regulation

§ 1.1295–3T(f)(1) and (4), respectively,

require the shareholder to have reasonably relied on a qualified tax professional

and to document such reliance. The Service will not grant consent under this

regime if doing so would prejudice the interests of the government by placing the

shareholder in a position more favorable

than if the shareholder had made the section 1295 election on a timely basis. The

temporary regulations provide that in certain cases the interests of the government

may be preserved by a closing agreement

between the Service and the shareholder

requiring the shareholder to make a payment to the government that compensates

the government for amounts that would

have been due in respect of closed years

affected by the retroactive election.

Under temporary regulation § 1.1295–

3T(f)(2), the Service will treat a shareholder as having reasonably relied on a

qualified tax professional (including an

February 23, 1998

employee of the shareholder), within the

meaning of the § 301.9100 regulations, if

the qualified tax professional failed to

identify the corporation as a PFIC or

failed to advise the shareholder of the

consequences of making, or failing to

make, a section 1295 election. Therefore,

if a qualified tax professional, due to ignorance of the law or negligence, failed to

identify the corporation as a PFIC or

failed to advise the shareholder of the

consequences of making, or failing to

make, the section 1295 election, the Commissioner may consent to a retroactive

election. However, in no event will the

Commissioner consent to a retroactive

election if, prior to the application for

such consent, the Service has raised the

PFIC status of the foreign corporation in

an audit of the retroactive election year or

any subsequent year. Furthermore, a

shareholder may not disregard knowledge

that the corporation was a PFIC or advice

or knowledge relating to the tax consequences of owning stock of a PFIC and

then request relief under this regime.

d. Who Makes a Retroactive Election

and Who Satisfies the Requirements

of the Protective or Consent

Regime.

Temporary regulation § 1.1295–3T

adopts the rules of temporary regulation

§ 1.1295–1T(d), relating to who may

make a section 1295 election, for purposes

of determining the appropriate person to

satisfy the requirements of the protective

or consent regime and to make a retroactive election. Consistent with these rules,

temporary regulation § 1.1295–3T(c)(3)

provides that the person that executes and

files the Protective Statement under the

protective regime is the person that makes

the section 1295 election, as provided in

§ 1.1295–1T(d). Temporary regulation

§ 1.1295–3T(f)(4)(vi) sets forth a similar

rule for requests for consent under the

consent regime. In addition, temporary

regulation § 1.1295–3T(g)(3) provides for

an entity-level retroactive election in the

case of domestic partnerships, S corporations, domestic nongrantor trusts, and domestic estates that own stock of a PFIC,

and a partner or beneficiary-level retroactive election in the case of foreign partnerships, foreign trusts, domestic grantor

trusts, and foreign estates that own stock

of a PFIC.

The Service welcomes comments concerning the benefits of requiring certain

entities, rather than their interest holders,

to satisfy the requirements under the protective and consent regimes. In particular, comments are requested concerning

whether requiring S corporations, domestic nongrantor trusts, and domestic estates

to satisfy the requirements of the protective regime at the entity-level is inappropriate.

e. Making a Retroactive Election.

A shareholder that has satisfied the requirements of the protective regime or has

obtained the consent of the Commissioner

under the consent regime must comply

with the rules in temporary regulation

§ 1.1295–3T(g) for making a retroactive

election. In general, the shareholder must

file an amended return for the retroactive

election year in which the shareholder

complies with the requirements for making a section 1295 election, report its pro

rata shares of the ordinary earnings and

net capital gain of the foreign corporation

for that year (section 1293 inclusion), if

any, and pay any taxes resulting from the

redetermination of its income and any applicable section 6621 interest. The shareholder also must file amended returns for

the taxable years that follow the retroactive election year in which the foreign

corporation is a PFIC and a QEF to report

the section 1293 inclusion for each of

these years, and pay the resulting tax and

section 6621 interest. If the shareholder’s

taxable year in which the corporation first

qualified as a PFIC, or the retroactive

election year or any subsequent taxable

years, are closed for the assessment of

PFIC related taxes (i.e., in certain cases

where the shareholder is a qualified shareholder or the shareholder has obtained the

consent of the Commissioner to file a

retroactive election), the shareholder must

file amended returns to report section

1293 inclusions in all open affected years

beginning with the first taxable year open

for the assessment of tax on such

amounts.

7. Removal of § 1.1291–9(i)(1).

Section 1121 of the 1997 TRA amends

section 1296, adding section 1296(e).

Section 1296(e) provides that after December 31, 1997, a controlled foreign corporation (as defined in section 957(a))

1998–8 I.R.B.

(CFC) will not be treated as a PFIC with

respect to a U.S. shareholder (as defined

in section 951(b)) of the CFC. After a

shareholder ceases to qualify for this exception, because the shareholder ceases to

be subject to subpart F, generally the

shareholder will have a new holding period for purposes of the PFIC provisions

pursuant to section 1296(e)(3)(A). However, pursuant to section 1296(e)(3)(B), if

the foreign corporation was a nonqualified fund before the shareholder qualified

for this exception, and the shareholder did

not make the section 1297(b)(1) election

to purge the stock of its PFIC taint, the

shareholder will not get a new holding period when it ceases to qualify for the exception for U.S. shareholders of CFCs.

Congress, in the Conference Report to the

1997 TRA, H.R. Rept. 105–220, 105th

Congress, 1st session, at 625, stated that

“the stock held by such shareholder continues to be treated as PFIC stock unless

the shareholder makes an election to pay

tax and an interest charge with respect to

the unrealized appreciation in the stock or

the accumulated earnings of the corporation.” Congress thus indicated its intent

that a shareholder may apply the rules of

either section 1291(d)(2)(A), the deemed

sale election, or section 1291(d)(2)(B),

the deemed dividend election, when making the section 1297(b)(1) election to

purge a former PFIC of its PFIC taint. In

order to give effect to that intent, Treasury

and the IRS have decided to remove

§ 1.1291–9(i)(1), which provides that the

rules of § 1.1291–9, the deemed dividend

election, do not apply to an election under

section 1297(b)(1). The removal of

§ 1.1291–9(i)(1) is effective as of January

2, 1998. Section 1.1291–9(i)(2) is not affected by the removal of § 1.1291–9(i)(1).

2, 1998, a shareholder that applied the

rules of section 1291(d)(2)(A) and

§ 1.1291–10 to a section 1297(b)(1) election, made with respect to a former PFIC

that was a CFC in its last taxable year as a

PFIC under section 1296(a), may file an

amended return for its taxable year that

includes the termination date, as defined

in § 1.1297–3T(a), and apply the rules of

the deemed dividend election to its section 1297(b)(1) election at any time before the expiration of the period of limitations for the assessment of taxes for that

taxable year. Section 1.1297–3T(c) is effective as of January 2, 1998.

Section 1.1293–1T also issued under

26 U.S.C. 1293.* * *

Section 1.1295–1T also issued under

26 U.S.C. 1295(b).

Section 1.1295–3T also issued under

26 U.S.C. 1295(b).* * *

Special Analyses

§ 1.1294–0 Table of contents.

It has been determined that this Treasury Decision is not a significant regulatory action as defined in Executive Order

12866. Therefore, a regulatory assessment is not required. Pursuant to section

7805(f) of the Internal Revenue Code,

these temporary regulations will be submitted to the Chief Counsel for Advocacy

of the Small Business Administration for

comment on their impact on small business. An initial regulatory flexibility

analysis has been prepared for the proposed regulations for which these temporary regulations serve as a text and which

is set forth in REG–115795–97.

This section contains a listing of the

headings for § 1.1294–1T.

Par. 4. The section heading and introductory text for § 1.1297–0 are added to

read as follows:

Drafting Information

The principal authors of these regulations are Gayle Novig and Judith Cavell

Cohen, of the Office of the Associate

Chief Counsel (International). Other personnel from the IRS and Treasury Department also participated in the development

of these regulations.

8. Section 1297.

The temporary regulations amend

§ 1.1297–3T to provide that a shareholder

of a former PFIC, within the meaning of

§ 1.1291–9(j)(2)(iv), that was a CFC during its last taxable year as a PFIC under

section 1296(a), may apply the rules of

the deemed dividend election under section 1291(d)(2)(B) and § 1.1291–9 to its

section 1297(b)(1) election made by the

time and in the manner provided in

§ 1.1297–3T(b). If the time for making a

section 1297(b)(1) election, provided in

§ 1.1297–3T(b), expired before January

1998–8 I.R.B

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1 and 602

are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding the following

entries, in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.1291–1T also issued under

26 U.S.C. 1291.* * *

§ 1.1291–0 [Amended]

Par. 2. Section 1.1291–0 is amended

by removing and reserving the entry for

§ 1.1291–9(i)(1).

Par. 3. The section heading and introductory text for § 1.1294–0 are added to

read as follows:

§ 1.1297–0 Table of contents.

This section contains a listing of the

headings for § 1.1297–3T.

§ 1.1291–0T [Amended]

Par. 5. Section 1.1291–0T is amended

by:

1. Transferring the listing of the section heading and entries for § 1.1294–1T

to new § 1.1294–0.

2. Transferring the listing of the section heading and entries for § 1.1297–3T

to new § 1.1297–0.

3. Removing the section heading and

introductory text.

Par. 6. Section 1.1291–1T is added to

read as follows.

§ 1.1291–1T Taxation of U.S. persons

that are shareholders of PFICs that re

not pedigreed QEFs (temporary).

(a) through (d) [Reserved].

(e) Exempt organization as shareholder—(1) In general. If the shareholder of a PFIC is an organization exempt from tax under this chapter, section

1291 and these regulations apply to such

shareholder only if a dividend from the

PFIC would be taxable to the organization

under subchapter F.

(2) Effective date. Paragraph (e)(1) of

this section is applicable on and after

April 1, 1992.

February 23, 1998

§ 1.1291–9 [Amended]

Par. 7. Section 1.1291–9 is amended

by removing and reserving paragraph

(i)(1).

Par. 8. Section 1.1293–0 is added to

read as follows.

§ 1.1293–0 Table of contents.

This section contains a listing of the

headings for § 1.1293–1T.

§ 1.1293–1T Current inclusion of income

of qualified electing funds (temporary).

(a) In general. [Reserved].

(1) Other rules. [Reserved].

(2) Net capital gain defined.

(i) In general.

(ii) Effective date.

(b) Other rules. [Reserved].

with respect to stock held by a

pass through entity.

(1) In general.

(2) QEF stock transferred to a pass

through entity.

(i) Pass through entity makes a section 1295 election.

(ii) Pass through entity does not make

a section 1295 election.

(3) Effective date.

Par. 9. Section 1.1293–1T is added to

read as follows:

§ 1.1293–1T Current taxation of income

from qualified electing funds

(temporary).

(a) In general. [Reserved].

(1) Other rules. [Reserved].

(2) Net capital gain defined—(i) In

general. This paragraph (a)(2) defines the

term net capital gain for purposes of sections 1293 and 1295 and the regulations

under those sections. The QEF, as defined in § 1.1291–9(j)(2)(i), in determining its net capital gain for a taxable year,

may either—

(A) Calculate and report the amount of

each category of long-term capital gain

provided in section 1(h) that was recognized by the PFIC in the taxable year;

(B) Calculate and report the amount of

net capital gain recognized by the PFIC in

the taxable year, stating that that amount

is subject to the highest capital gain rate

of tax applicable to the shareholder; or

for the taxable year and report the entire

amount as ordinary earnings.

February 23, 1998

(ii) Effective date. Paragraph (a)(2)(i)

of this section is applicable to sales by

QEFs during their taxable years ending on

or after May 7, 1997.

(b) Other rules. [Reserved].

with respect to stock held by a pass

through entity—(1) In general. A domestic pass through entity takes into account

its pro rata shares of the ordinary earnings

and net capital gain attributable to the

QEF shares held by the pass through entity. A U.S. person that indirectly owns

QEF shares through the domestic pass

through entity accounts for its pro rata

shares of ordinary earnings and net capital

gain attributable to the QEF shares according to the general rules applicable to

inclusions of income from the domestic

pass through entity. For the definition of

pass through entity, see § 1.1295–1T(j).

(2) QEF stock transferred to a pass

through entity—(i) Pass through entity

makes a section 1295 election. If a shareholder transfers stock subject to a section

1295 election to a domestic pass through

entity of which it is an interest holder and

the pass through entity makes a section

1295 election with respect to that stock,

as provided in § 1.1295–1T(d)(2), the

shareholder takes into account its pro rata

shares of the ordinary earnings and net

capital gain attributable to the QEF shares

under the rules applicable to inclusions of

income from the pass through entity.

(ii) Pass through entity does not make a

section 1295 election. If the pass through

entity does not make a section 1295 election with respect to the PFIC, the shares of

which were transferred to the pass through

entity subject to the 1295 election of the

shareholder, the shareholder continues to

be subject, in its capacity as an indirect

shareholder, to the income inclusion rules

of section 1293 and reporting rules required of shareholders of QEFs. Proper

adjustments to reflect an inclusion in income under section 1293 by the indirect

shareholder must be made, under the principles of § 1.1291–9(f), to the basis of the

indirect shareholder’s interest in the pass

through entity.

(3) Effective date. Paragraph (c) of

this section is applicable to taxable years

of shareholders beginning after December

31, 1997.

Par. 10. Section 1.1295–0 is added to

read as follows:

§ 1.1295–0 Table of contents.

This section contains a listing of the

headings for §§ 1.1295–1T and

1.1295–3T.

§ 1.1295–1T Qualified electing funds

(temporary).

(a) In general. [Reserved].

(b) Application of section 1295 election. [Reserved].

(1) Election personal to shareholder.

[Reserved].

(2) Election applicable to specific

corporation only.

(i) In general. [Reserved].

(ii) Stock of QEF received in a nonrecognition transfer. [Reserved].

(iii) Exception for options.

(3) Application of general rules to

stock held by a pass through entity.

(i) Stock subject to a section 1295

election transferred to a pass

through entity.

(ii) Limitation on application of pass

through entity’s section 1295 election.

(iii) Effect of partnership termination

on section 1295 election.

(iv) Characterization of stock held

through a pass through entity.

(4) Application of general rules to a

taxpayer filing a joint return under

section 6013.

(1) In general.

(2) Years to which section 1295 election applies.

(i) In general.

(ii) Effect of PFIC status on election.

(iii) Effect on election of complete termination of a shareholder’s interest in the PFIC.

(iv) Effect on section 1295 election of

transfer of stock to a domestic

pass through entity.

(v) Examples.

(d) Who may make a section 1295

election.

(1) General rule.

(2) Application of general rule to pass

through entities.

(i) Partnerships.

(A) Domestic partnership.

(B) Foreign partnership.

(ii) S corporation.

(iii) Trust or estate.

1998–8 I.R.B.

(A) Domestic trust or estate.

(1) Nongrantor trust or estate.

(2) Grantor trust.

(B) Foreign trust or estate.

(1) Nongrantor trust or estate.

(2) Grantor trust.

(iv) Indirect ownership of the pass

through entity or the PFIC.

(3) Member of consolidated return

group as shareholder.

(4) Option holder.

(5) Exempt organization.

(e) Time for making a section 1295

election.

(f) Manner of making a section 1295

election and the annual election

requirements of the shareholder.

(1) Manner of making the election.

(2) Annual election requirements.

(i) In general.

(ii) Retention of documents.

(g) Annual election requirements of

the PFIC or intermediary.

(1) PFIC Annual Information Statement.

(2) Alternative documentation.

(3) Annual Intermediary Statement.

(4) Combined statements.

(i) PFIC Annual Information Statement.

(ii) Annual Intermediary Statement.

(h) Transition rules.

(i) Invalidation, termination or revocation of section 1295 election.

(1) Invalidation or termination of

election at the discretion of the

Commissioner.

(i) In general.

(ii) Deferral of section 1293 inclusion.

(iii) When effective.

(2) Shareholder revocation.

(i) In general.

(ii) Time for and manner of requesting consent to revoke.

(A) Time.

(B) Manner of making request.

(iii) When effective.

(3) Effect of invalidation, termination, or revocation.

(4) Election after invalidation, termination, or revocation.

(j) Definitions.

(k) Effective date.

(a) In general.

General rule.

Protective Statement.

In general.

Reasonable belief statement.

Who executes and files the Protective Statement.

(4) Waiver of the periods of limitations.

(i) Time for and manner of extending

periods of limitations.

(A) In general.

(B) Application of general rule to domestic partnerships.

(1) In general.

(2) Special rules.

(i) Addition of partner to nonTEFRA partnership.

(ii) Change in status from nonTEFRA partnership to TEFRA

partnership.

(D) Application of general rule to S

corporations.

(E) Effect on waiver of complete termination of a pass through entity

or pass through entity’s business.

(F) Application of general rule to foreign partnerships, foreign trusts,

domestic or foreign grantor trusts,

and foreign estates.

(ii) Terms of waiver.

(A) Scope of waiver.

(B) Period of waiver.

(5) Time for and manner of filing a

Protective Statement.

(i) In general.

(ii) Special rule for taxable years

ended before January 2, 1998.

(6) Applicability of the Protective

Statement.

(i) In general.

(ii) Invalidity of the Protective Statement.

(7) Retention of Protective Statement

and information demonstrating

reasonable belief.

(d) Reasonable belief.

(1) In general.

(2) Knowledge of law required.

(e) Special rules for qualified shareholders.

(1) In general.

(2) Qualified shareholder.

(3) Exceptions.

(f) Special consent.

(1) In general.

1998–8 I.R.B

§ 1.1295–3T Retroactive elections

(temporary).

(b)

(c)

(1)

(2)

(3)

(2) Reasonable reliance on a qualified

tax professional.

(i) In general.

(ii) Shareholder deemed to have not

reasonably relied on a qualified

tax professional.

(3) Prejudice to the interests of the

United States government.

(i) General rule.

(ii) Elimination of prejudice to the interests of the United States government.

(4) Procedural requirements.

(i) Filing instructions.

(ii) Affidavit from shareholder.

(iii) Affidavits from other persons.

(iv) Other information.

(v) Notification of Internal Revenue

Service.

(vi) Who requests special consent

under this paragraph (f) and who

enters into a closing agreement.

(g) Time for and manner of making a

retroactive election.

(1) Time for making a retroactive

election.

(i) In general.

(ii) Transition rule.

(iii) Ownership not required at time

retroactive election is made.

(2) Manner of making a retroactive

election.

(3) Who makes the retroactive election.

(4) Other elections.

(i) Section 1291(d)(2) election.

(ii) Section 1294 election.

(h) Effective date.

Par. 11. Section 1.1295–1T is added to

read as follows:

§ 1.1295–1T Qualified electing funds

(temporary).

(a) In general. [Reserved].

(b) Application of section 1295 election. [Reserved].

(1) Election personal to shareholder.

[Reserved].

(2) Election applicable to specific corporation only—

(i) In general. [Reserved].

(ii) Stock of QEF received in a nonrecognition transfer. [Reserved].

(iii) Exception for options. A shareholder’s section 1295 election does not

apply to any option to buy stock of the

PFIC.

(3) Application of general rules to

stock held by a pass through entity—(i)

February 23, 1998

Stock subject to a section 1295 election

transferred to a pass through entity. A

shareholder’s section 1295 election will

not apply to a domestic pass through entity to which the shareholder transfers

stock subject to a section 1295 election,

or to any other U.S. person that is an interest holder or beneficiary of the domestic pass through entity. However, as provided in paragraph (c)(2)(iv) of this

section (relating to a transfer to a domestic pass through entity of stock subject to

a section 1295 election), a shareholder

that transfers stock subject to a section

1295 election to a pass through entity will

continue to be subject to the section 1295

election with respect to the stock indirectly owned through the pass through entity and any other stock of that PFIC

owned by the shareholder.

(ii) Limitation on application of pass

through entity’s section 1295 election.

Except as provided in paragraph (c)(2)(iv)

of this section, a section 1295 election

made by a domestic pass through entity

does not apply to other stock of the PFIC

held directly or indirectly by the interest

holder or beneficiary.

(iii) Effect of partnership termination

on section 1295 election. Termination of

a section 1295 election made by a domestic partnership by reason of the termination of the partnership under section

708(b) will not terminate the section 1295

election with respect to partners of the terminated partnership that are partners of

the new partnership. Except as otherwise

provided, the stock of the PFIC of which

the new partners are indirect shareholders

will be treated as stock of a QEF only if

the new domestic partnership makes a

section 1295 election with respect to that

stock.

(iv) Characterization of stock held

through a pass through entity. Stock of a

PFIC held through a pass through entity

will be treated as stock of a pedigreed

QEF with respect to an interest holder or

beneficiary only if—

(A) In the case of PFIC stock acquired

(other than in a transaction in which gain

is not recognized pursuant to regulations

under section 1291(f) with respect to that

stock), and held by a domestic pass

through entity, the pass through entity

makes the section 1295 election and the

PFIC has been a QEF with respect to the

pass through entity for all taxable years

February 23, 1998

that are included wholly or partly in the

pass through entity’s holding period of the

PFIC stock and during which the foreign

corporation was a PFIC within the meaning of § 1.1291–9(j)(1); or

(B) In the case of PFIC stock transferred by an interest holder or beneficiary

to a pass through entity in a transaction in

which gain is not recognized pursuant to

regulations under section 1291(f) with respect to that stock and held by the pass

through entity, the PFIC stock transferred

to the pass through entity was treated as

stock of a pedigreed QEF with respect to

the interest holder or beneficiary at the

time of the transfer and the pass through

entity makes a section 1295 election.

(4) Application of general rules to a

taxpayer filing a joint return under section 6013. A section 1295 election made

by a taxpayer in a joint return, within the

meaning of section 6013, will be treated

as also made by the spouse that joins in

the filing of that return.

In general. Except as otherwise provided

in this paragraph (c), the effect of a shareholder’s section 1295 election is to treat

the foreign corporation as a QEF with respect to the shareholder for each taxable

year of the foreign corporation ending

with or within a taxable year of the shareholder for which the election is effective.

A section 1295 election is effective for the

shareholder’s election year and all subsequent taxable years of the shareholder unless invalidated, terminated or revoked as

provided in paragraph (i) of this section.

The terms shareholder and shareholder’s

election year are defined in paragraph (j)

of this section.

(2) Years to which section 1295 election applies—(i) In general. Except as

otherwise provided in this paragraph (c),

a foreign corporation with respect to

which a section 1295 election is made

will be treated as a QEF for its taxable

year ending with or within the shareholder’s election year and all subsequent

taxable years of the foreign corporation

that are included wholly or partly in the

shareholder’s holding period (or periods)

of stock of the foreign corporation.

(ii) Effect of PFIC status on election.

A foreign corporation will not be treated

as a QEF for any taxable year of the foreign corporation that the foreign corpora-

tion is not a PFIC under section 1296(a)

and is not treated as a PFIC under section

1297(b)(1). However, cessation of a foreign corporation’s status as a PFIC will

not terminate a section 1295 election.

(iii) Effect on election of complete termination of a shareholder’s interest in the

PFIC. Complete termination of a shareholder’s direct and indirect interest in stock

of a foreign corporation will not terminate

a shareholder’s section 1295 election with

respect to the foreign corporation.

(iv) Effect on section 1295 election of

transfer of stock to a domestic pass

through entity. The transfer of a shareholder’s direct or indirect interest in stock

of a foreign corporation to a domestic

pass through entity (as defined in paragraph (j) of this section) will not terminate the shareholder ’s section 1295

election with respect to the foreign corporation, whether or not the pass through

entity makes a section 1295 election. For

the rules concerning the application of

section 1293 to stock transferred to a domestic pass through entity, see

§ 1.1293–1T(c).

(v) Examples. The following examples illustrate the rules of this paragraph

(c)(2).

Example 1. In 1998, C, a U.S. person, purchased

stock of FC, a foreign corporation that is a PFIC.

Both FC and C are calendar year taxpayers. C made

a timely section 1295 election to treat FC as a QEF

in C’s 1998 return, and FC was therefore a pedigreed

QEF. C included its shares of FC’s 1998 ordinary

earnings and net capital gain in C’s 1998 income and

did not make a section 1294 election to defer the

time for payment of tax on that income. In 1999,

2000, and 2001, FC did not satisfy either the income

or asset test of section 1296(a), and therefore was

neither a PFIC nor a QEF. C therefore did not have

to include its pro rata shares of the ordinary earnings

and net capital gain of FC pursuant to section 1293,

or satisfy the section 1295 annual reporting requirements for any of those years. FC qualified as a PFIC

again in 2002. Because C had made a section 1295

election in 1998, and the election had not been invalidated, terminated, or revoked, within the meaning

of paragraph (i) of this section, C’s section 1295

election remains in effect for 2002. C therefore is

subject in 2002 to the income inclusion and reporting rules required of shareholders of QEFs.

Example 2. The facts are the same as in Example

(1) except that FC did not lose PFIC status in any

year and C sold all the FC stock in 1999 and repurchased stock of FC in 2002. Because C had made a

section 1295 election in 1998 with respect to stock

of FC, and the election had not been invalidated, terminated, or revoked, within the meaning of paragraph (i) of this section, C’s section 1295 election

remained in effect and therefore applies to the stock

1998–8 I.R.B.

of FC purchased by C in 2002. C therefore is subject in 2002 to the income inclusion and reporting

rules required of shareholders of QEFs.

Example 3. The facts are the same as in Example

(2) except that C is a partner in domestic partnership

P and C transferred its FC stock to P in 1999. Because C had made a section 1295 election in 1998

with respect to stock of FC, and the election had not

been invalidated, terminated, or revoked, within the

meaning of paragraph (i) of this section, C’s section

1295 election remains in effect with respect to its indirect interest in the stock of FC. If P does not make

the section 1295 election with respect to the FC

stock, C will continue to be subject, in C’s capacity

as an indirect shareholder of FC, to the income inclusion and reporting rules required of shareholders

of QEFs in 1999 and subsequent years. If P makes

the section 1295 election, C will take into account its

pro rata shares of the ordinary earnings and net capital gain of the FC under the rules applicable to inclusions of income from P.

(d) Who may make a section 1295

election—(1) General rule. Except as

otherwise provided in this paragraph (d),

any U.S. person that is a shareholder (as

defined in paragraph (j) of this section) of

a PFIC, including a shareholder that holds

stock of a PFIC in bearer form, may make

a section 1295 election with respect to

that PFIC. The shareholder need not own

directly or indirectly any stock of the

PFIC at the time the shareholder makes

the section 1295 election provided the

shareholder is a shareholder of the PFIC

during the taxable year of the PFIC that

ends with or within the taxable year of the

shareholder for which the section 1295

election is made. Except in the case of a

shareholder that is an exempt organization that may not make a section 1295

election, as provided in paragraph (d)(5)

of this section, in a chain of ownership

only the first U.S. person that is a shareholder of the PFIC may make the section

1295 election.

(2) Application of general rule to pass

through entities—(i) Partnerships—(A)

Domestic partnership. A domestic partnership that holds an interest in stock of a

PFIC makes the section 1295 election

with respect to that PFIC. The partnership election applies only to the stock of

the PFIC held directly or indirectly by the

partnership and not to any other stock

held directly or indirectly by any partner.

As provided in § 1.1293–1T(c)(1), shareholders owning stock of a QEF by reason

of an interest in the partnership take into

account the section 1293 inclusions with

respect to the QEF shares owned by the

partnership under the rules applicable to

1998–8 I.R.B

inclusions of income from the partnership.

(B) Foreign partnership. A U.S. person that holds an interest in a foreign partnership that, in turn, holds an interest in

stock of a PFIC makes the section 1295

election with respect to that PFIC. A partner’s election applies to the stock of the

PFIC owned directly or indirectly by the

foreign partnership and to any other stock

of the PFIC owned by that partner. A section 1295 election by a partner applies

only to that partner.

(ii) S corporation. An S corporation

that holds an interest in stock of a PFIC

makes the section 1295 election with respect to that PFIC. The S corporation election applies only to the stock of the PFIC

held directly or indirectly by the S corporation and not to any other stock held directly

or indirectly by any S corporation shareholder. As provided in § 1.1293–1T(c)(1),

shareholders owning stock of a QEF by

reason of an interest in the S corporation

take into account the section 1293 inclusions with respect to the QEF shares

under the rules applicable to inclusions of

income from the S corporation.

(iii) Trust or estate—(A) Domestic

trust or estate—(1) Nongrantor trust or

estate. A domestic nongrantor trust or a

domestic estate that holds an interest in

stock of a PFIC makes the section 1295

election with respect to that PFIC. The

trust or estate’s election applies only to the

stock of the PFIC held directly or indirectly by the trust or estate and not to any

other stock held directly or indirectly by

any beneficiary. As provided in § 1.1293–

1T(c)(1), shareholders owning stock of a

QEF by reason of an interest in a domestic trust or estate take into account the

section 1293 inclusions with respect to

the QEF shares under the rules applicable

to inclusions of income from the trust or

estate.

(2) Grantor trust. A U.S. person that is

treated under sections 671 through 678 as

the owner of the portion of a domestic

trust that owns an interest in stock of a

PFIC makes the section 1295 election

with respect to that PFIC. If that person

ceases to be treated as the owner of the

portion of the trust that owns an interest in

the PFIC stock and is a beneficiary of the

trust, that person’s section 1295 election

will continue to apply to the PFIC stock

indirectly owned by that person under the

rules of paragraph (c)(2)(iv) of this section as if the person had transferred its interest in the PFIC stock to the trust. However, the stock will be treated as stock of a

PFIC that is not a QEF with respect to

other beneficiaries of the trust, unless the

trust makes the section 1295 election as

provided in paragraph (d)(2)(iii)(A)(1) of

this section.

(B) Foreign trust or estate—(1) Nongrantor trust or estate. A U.S. person that

is a beneficiary of a foreign nongrantor

trust or estate that holds an interest in

stock of a PFIC makes the section 1295

election with respect to that PFIC. A beneficiary’s section 1295 election applies to

all the PFIC stock owned directly and indirectly by the trust or estate and to the

other PFIC stock owned directly or indirectly by the beneficiary. A section 1295

election by a beneficiary applies only to

that beneficiary.

(2) Grantor trust. A U.S. person that is

treated under sections 671 through 679 as

the owner of the portion of a foreign trust

that owns an interest in stock of a PFIC

stock makes the section 1295 election

with respect to that PFIC. If that person

ceases to be treated as the owner of the

portion of the trust that owns an interest in

the PFIC stock and is a beneficiary of the

trust, that person’s section 1295 election

will continue to apply to the PFIC stock

indirectly owned by that person under the

rules of paragraph (c)(2)(iv) of this section. However, as provided in paragraph

(d)(2)(iii)(B)(1) of this section, any other

shareholder that is a beneficiary of the

trust and that wishes to treat the PFIC as a

QEF must make the section 1295 election.

(iv) Indirect ownership of the pass

through entity or the PFIC. The rules of

this paragraph (d)(2) apply whether or not

the shareholder holds its interest in the

pass through entity directly or indirectly

and whether or not the pass through entity

holds its interest in the PFIC directly or

indirectly.

(3) Member of consolidated return

group as shareholder. Pursuant to

§ 1.1502–77(a), the common parent of an

affiliated group of corporations that join

in filing a consolidated income tax return

makes a section 1295 election for all

members of the affiliated group. An election by a common parent will be effective

for all members of the affiliated group

with respect to interests in PFIC stock

February 23, 1998

held at the time the election is made or at

any time thereafter. A separate election

must be made by the common parent for

each PFIC of which a member of the affiliated group is a shareholder.

(4) Option holder. A holder of an option to acquire stock of a PFIC may not

make a section 1295 election that will

apply to the option or to the stock subject

to the option.

(5) Exempt organization. A tax-exempt organization that is not taxable

under section 1291, pursuant to § 1.1291–

1T(e), with respect to a PFIC may not

make a section 1295 election with respect

to that PFIC. In addition, such an exempt

organization will not be subject to any

section 1295 election made by a domestic

pass through entity.

(e) Time for making a section 1295

election. Except as provided in § 1.1295–

3T, a shareholder making the section 1295

election must make the election on or before the due date, as extended under section 6081 (election due date), for filing

the shareholder’s income tax return for

the first taxable year to which the election

will apply. The section 1295 election

must be made in the original return for

that year, or in an amended return, provided the amended return is filed on or

before the election due date.

(f) Manner of making a section 1295

election and the annual election requirements of the shareholder—(1) Manner of

making the election. A shareholder must

make a section 1295 election by—

(i) Completing Form 8621 in the manner required by that form and this section

for making the section 1295 election;

(ii) Attaching Form 8621 to its federal

income tax return filed by the election due

date for the shareholder’s election year;

(iii) Receiving and reflecting in Form

8621 the information provided in the

PFIC Annual Information Statement described in paragraph (g)(1) of this section,

the Annual Intermediary Statement described in paragraph (g)(3) of this section,

or the applicable combined statement described in paragraph (g)(4) of this section,

for the taxable year of the PFIC ending

with or within the taxable year for which

Form 8621 is being filed. If the PFIC Annual Information Statement contains a

statement described in paragraph

(g)(1)(ii)(C) of this section, the shareholder must attach a statement to Form

February 23, 1998

8621 that indicates that the shareholder

rather than the QEF calculated the QEF’s

ordinary earnings and net capital gain;

and

(iv) Filing a copy of Form 8621 with

the Philadelphia Service Center, P.O.

21086, Philadelphia, PA 19114 by the

election due date.

(2) Annual election requirements—(i)

In general. A shareholder that makes a

section 1295 election with respect to a

PFIC held directly or indirectly, for each

taxable year to which the section 1295

election applies, must—

(A) Complete Form 8621 in the manner required by that form and this section;

(B) Attach Form 8621 to its federal income tax return filed by the due date of

the return, as extended;

the PFIC Annual Information Statement

described in paragraph (g)(1) of this section, the Annual Intermediary Statement

described in paragraph (g)(3) of this section, or the applicable combined statement described in paragraph (g)(4) of this

section, for the taxable year of the PFIC

ending with or within the taxable year for

which Form 8621 is being filed. If the

PFIC Annual Information Statement contains a statement described in paragraph

(g)(1)(ii)(C) of this section, the shareholder must attach a statement to its Form

8621 that the shareholder rather than the

PFIC provided the calculations of the

PFIC’s ordinary earnings and net capital

gain; and

(D) File a copy of Form 8621 with the

Philadelphia Service Center, P.O. 21086,

Philadelphia, PA 19114 by the election

due date.

(ii) Retention of documents. For all

taxable years subject to the section 1295

election, the shareholder must retain

copies of all Forms 8621, with their attachments, and PFIC Annual Information

Statements or Annual Intermediary Statements. Failure to produce those documents at the request of the Commissioner

in connection with an examination may

result in invalidation or termination of the

shareholder’s section 1295 election.

(g) Annual election requirements of the

PFIC or intermediary—(1) PFIC Annual

Information Statement. For each year of

the PFIC ending in a taxable year of a

shareholder to which the shareholder’s

section 1295 election applies, the PFIC

must provide the shareholder with a PFIC

Annual Information Statement. The PFIC

Annual Information Statement is a statement of the PFIC, signed by the PFIC or

an authorized representative of the PFIC,

that contains the following information

and representation—

(i) The first and last days of the taxable

year of the PFIC to which the PFIC Annual Information Statement applies;

(ii) Either—

(A) The shareholder’s pro rata shares

of the ordinary earnings and net capital

gain (as defined in § 1.1293–1T(a)(2)) of

the PFIC for the taxable year indicated in

paragraph (g)(1)(i) of this section; or

(B) Sufficient information to enable the

shareholder to calculate its pro rata shares

of the PFIC’s ordinary earnings and net

capital gain, for that taxable year; or

other documents of the foreign corporation for the shareholder to calculate the

amounts of the PFIC’s ordinary earnings

and the net capital gain according to federal income tax accounting principles and

to calculate the shareholder’s pro rata

shares of the PFIC’s ordinary earnings

and net capital gain;

(iii) The amount of cash and the fair

market value of other property distributed

or deemed distributed to the shareholder

during the taxable year of the PFIC to

which the PFIC Annual Information

Statement pertains; and

(iv) Either—

(A) A statement that the PFIC will permit the shareholder to inspect and copy

the PFIC’s permanent books of account,

records, and such other documents as may

be maintained by the PFIC to establish

that the PFIC’s ordinary earnings and net

capital gain are computed in accordance

with U.S. income tax principles, and to

verify these amounts and the shareholder’s pro rata shares thereof; or

(B) In lieu of the statement required in

paragraph (g)(1)(iv)(A) of this section, a

description of the alternative documentation requirements approved by the Commissioner, with a copy of the private letter

ruling and the closing agreement entered

into by the Commissioner and the PFIC

pursuant to paragraph (g)(2) of this section.

(2) Alternative documentation. In rare

and unusual circumstances, the Commis-

1998–8 I.R.B.

sioner will consider alternative documentation requirements necessary to verify

the ordinary earnings and net capital gain

of a PFIC other than the documentation

requirements described in paragraph

(g)(1)(iv)(A) of this section. Alternative

documentation requirements will be allowed only pursuant to a private letter ruling and a closing agreement entered into

by the Commissioner and the PFIC describing an alternative method of verifying the PFIC’s ordinary earnings and net

capital gain. If the PFIC has not obtained

a private letter ruling from the Commissioner approving an alternative method of

verifying the PFIC’s ordinary earnings

and net capital gain by the time a shareholder is required to make a section 1295

election, the shareholder may not use an

alternative method for that taxable year.

(3) Annual Intermediary Statement. In

the case of a U.S. person that is a shareholder of a PFIC through an intermediary,

as defined in paragraph (j) of this section,

an Annual Intermediary Statement issued

by an intermediary containing the information described in paragraph (g)(1) of

this section and reporting the indirect

owner’s pro rata shares of the ordinary

earnings and net capital gain of the QEF

as described in paragraph (g)(1)(ii)(A) of

this section, may be provided to the indirect owner in lieu of the PFIC Annual Information Statement if the following conditions are satisfied—

(i) The intermediary receives a copy of

the PFIC Annual Information Statement

or the intermediary receives an annual intermediary statement from another intermediary which contains a statement that

the other intermediary has received a

copy of the PFIC Annual Information

Statement and represents that the conditions of paragraphs (g)(3)(ii) and

(g)(3)(iii) of this section are met;

(ii) The representations and information contained in the Annual Intermediary

Statement reflect the representations and

information contained in the PFIC Annual

Information Statement; and

(iii) The PFIC Annual Information

Statement issued to the intermediary contains either the representation set forth in

paragraph (g)(1)(iv)(A) of this section, or,

if alternative documentation requirements

were approved by the Commissioner pursuant to paragraph (g)(2) of this section, a

copy of the private letter ruling and clos-

1998–8 I.R.B

ing agreement between the Commissioner

and the PFIC, agreeing to an alternative

method of verifying PFIC ordinary earnings and net capital gain as described in

paragraph (g)(2) of this section;

(4) Combined statements—(i) PFIC

Annual Information Statement. A PFIC

that owns directly or indirectly any stock

of one or more PFICs with respect to

which a shareholder may make the section 1295 election may prepare a PFIC

Annual Information Statement that combines with its own information and representations the information and representations of all the PFICs. The PFIC may use

any format for a combined PFIC Annual

Information Statement provided the required information and representations

are separately stated and identified with

the respective corporations.

(ii) Annual Intermediary Statement.

An intermediary described in paragraph

(g)(3) of this section that owns directly or

indirectly stock of one or more PFICs

with respect to which an indirect shareholder may make the section 1295 election may prepare an Annual Intermediary

Statement that combines with its own information and representations the information and representations with respect to

all the PFICs. The intermediary may use

any format for a combined Annual Intermediary Statement provided the required

information and representations are separately stated and identified with the intermediary and the respective corporations.

(h) Transition rules. The rules of Notice 88–125, 1988–2 C.B. 535 (see

§ 601.601(d)(2)(ii)(b) of this chapter),

apply for making elections and maintaining elections for taxable years beginning

after December 31, 1986, and before January 1, 1998. Elections made under Notice 88–125 must be maintained as provided in § 1.1295–1T for taxable years

beginning after December 31, 1997. A

section 1295 election made prior to February 1, 1998, that was intended to be effective for the taxable year of the PFIC

that began during the shareholder’s election year will be effective for that taxable

year of the foreign corporation provided

that it is clear from all the facts and circumstances that the shareholder intended

the election to be effective for that taxable

year of the foreign corporation.

(i) Invalidation, termination, or revocation of section 1295 election—(1) In-

validation or termination of election at

the discretion of the Commissioner—(i)

In general. The Commissioner, in the

Commissioner’s discretion, may invalidate or terminate a section 1295 election

applicable to a shareholder if the shareholder, the PFIC, or any intermediary

fails to satisfy the requirements for making a section 1295 election or the annual

election requirements of this section to

which the shareholder, PFIC, or intermediary is subject, including the requirement

to provide, on request, copies of the books

and records of the PFIC or other documentation substantiating the ordinary

earnings and net capital gain of the PFIC.

(ii) Deferral of section 1293 inclusion.

The Commissioner may invalidate any

pass through entity section 1295 election

with respect to an interest holder or beneficiary if the section 1293 inclusion with

respect to that interest holder or beneficiary is not included in the gross income

of either the pass through entity, an intermediate pass through entity, or the interest holder or beneficiary within two years

of the end of the PFIC’s taxable year due

to nonconforming taxable years of the interest holder and the pass through entity

or any intermediate pass through entity.

(iii) When effective. Termination of a

shareholder’s section 1295 election will

be effective for the taxable year of the

PFIC determined by the Commissioner in

the Commissioner’s discretion. An invalidation of a shareholder’s section 1295

election will be effective for the first taxable year to which the section 1295 election applied, and the shareholder whose

election is invalidated will be treated as if

the section 1295 election never was

made.

(2) Shareholder revocation—(i) In

general. In the Commissioner’s discretion, upon a finding of a substantial

change in circumstances, the Commissioner may consent to a shareholder’s request to revoke a section 1295 election.

Request for revocation must be made by

the shareholder that made the election and

at the time and in the manner provided in

paragraph (i)(2)(ii) of this section.

(ii) Time for and manner of requesting

consent to revoke—(A) Time. The shareholder must request consent to revoke the

section 1295 election no later than 12 calendar months after the discovery of the

substantial change of circumstances that

February 23, 1998

forms the basis for the shareholder’s request to revoke the section 1295 election.

(B) Manner of making request. A

shareholder requests consent to revoke a

section 1295 election by filing a ruling request with the Office of the Associate

Chief Counsel (International). The ruling

request must satisfy the requirements, including payment of the user fee, for filing

ruling requests with that office.

(iii) When effective. Unless otherwise

determined by the Commissioner, revocation of a section 1295 election will be effective for the first taxable year of the

PFIC beginning after the date the Commissioner consents to the revocation.

(3) Effect of invalidation, termination,

or revocation. An invalidation, termination, or revocation of a section 1295 election—

(i) Terminates all section 1294 elections, as provided in § 1.1294–1T(e), and

the undistributed PFIC earnings tax liability and interest thereon are due by the due

date, without regard to extensions, for the

return for the last taxable year of the

shareholder to which the section 1295

election applies;

(ii) In the Commissioner’s discretion,

results in a deemed sale of the QEF stock

on the last day of the PFIC’s last taxable

year as a QEF, in which gain, but not loss,

will be recognized and with respect to

which appropriate basis and holding period adjustments will be made; and

(iii) Subjects the shareholder to any

other terms and conditions that the Commissioner determines are necessary to ensure the shareholder’s compliance with

sections 1291 through 1297 or any other

provisions of the Code.

(4) Election after invalidation, termination, or revocation. Without the Commissioner’s consent a shareholder whose

section 1295 election was invalidated, terminated, or revoked under this paragraph

(i) may not make the section 1295 election with respect to the PFIC before the

sixth taxable year ending after the taxable

year in which the invalidation, termination, or revocation became effective.

(j) Definitions. For purposes of this

section—

Intermediary is a nominee or shareholder of record that holds stock on behalf

of the shareholder or on behalf of another

person in a chain of ownership between

the shareholder and the PFIC, and any di-

February 23, 1998

rect or indirect beneficial owner of PFIC

stock (including a beneficial owner that is

a pass through entity) in the chain of ownership between the shareholder and the

PFIC.

Pass through entity is a partnership, S

corporation, trust, or estate.

Shareholder has the same meaning as

the term shareholder in § 1.1291–9(j)(3),

except that for purposes of this section, a

partnership and an S corporation also are

treated as shareholders. Furthermore, unless otherwise provided, an interest holder

of a pass through entity, which is treated

as a shareholder of a PFIC, also will be

treated as a shareholder of the PFIC.

Shareholder’s election year is the taxable year of the shareholder for which it

made the section 1295 election.

(k) Effective date. Section 1.1295–

1T(b)(2)(iii), (b)(3), (b)(4), and (c)

through (j) is applicable to taxable years

of shareholders beginning after December

31, 1997.

Par. 12. Section 1.1295–3T is added to

read as follows:

§ 1.1295–3T Retroactive elections

(temporary).

(a) In general. This section prescribes

the exclusive rules under which a shareholder, as defined in § 1.1295–1T(j), may

make a section 1295 election for a taxable

year after the election due date, as defined

in § 1.1295–1T(e) (retroactive election).

Therefore, a shareholder may not seek

such relief under any other provision of

the law, including § 301.9100 of this

chapter. Paragraph (b) of this section describes the general rules for a shareholder

to preserve the ability to make a retroactive election. These rules require that the

shareholder possess reasonable belief as

of the election due date that the foreign

corporation was not a PFIC for its taxable

year that ended in the shareholder’s taxable year to which the election due date

pertains, and that the shareholder file a

Protective Statement to preserve its ability to make a retroactive election. Paragraph (c) of this section establishes the

terms, conditions and other requirements

with respect to a Protective Statement required to be filed under the general rules.

Paragraph (d) of this section sets forth

factors that establish a shareholder’s reasonable belief that a foreign corporation

was not a PFIC. Paragraph (e) of this section prescribes special rules for certain

shareholders that are deemed to satisfy the

reasonable belief requirement and therefore are not required to file a Protective

Statement. Paragraph (f) of this section

describes the limited circumstances under

which the Commissioner may permit a

shareholder that lacked the requisite reasonable belief or failed to satisfy the requirements of paragraph (b) or (e) of this

section to make a retroactive election.

Paragraph (g) of this section provides the

time for and manner of making a retroactive election. Paragraph (h) of this section

provides the effective date of this section.

(b) General rule. Except as provided

in paragraphs (e) and (f) of this section, a

shareholder may make a retroactive election for a taxable year of the shareholder

(retroactive election year) only if the

shareholder—

(1) Reasonably believed, within the

meaning of paragraph (d) of this section,

as of the election due date that the foreign

corporation was not a PFIC for its taxable

year that ended during the retroactive

election year;

(2) Filed a Protective Statement with

respect to the foreign corporation, applicable to the retroactive election year, in

which the shareholder described the basis

for its reasonable belief and extended, in

the manner provided in paragraph (c)(4)

of this section, the periods of limitations

on the assessment of taxes determined

under sections 1291 through 1297 with

respect to the foreign corporation (PFIC

related taxes) for all taxable years of the

shareholder to which the Protective Statement applies; and

(3) Complied with the other terms and

conditions of the Protective Statement.

by the shareholder, or a person authorized

to sign a federal income tax return on behalf of the shareholder, that preserves the

shareholder’s ability to make a retroactive

election. To file a Protective Statement

that applies to a taxable year of the shareholder, the shareholder must reasonably

believe as of the election due date that the

foreign corporation was not a PFIC for

the foreign corporation’s taxable year that

ended during the retroactive election year.

The Protective Statement must contain—

1998–8 I.R.B.

(i) The shareholder’s reasonable belief

statement, as described in paragraph

(c)(2) of this section;

(ii) The shareholder’s agreement extending the periods of limitations on the

assessment of PFIC related taxes for all

taxable years to which the Protective

Statement applies, as provided in paragraph (c)(4) of this section; and

(iii) The following information and

representations—

(A) The shareholder’s name, address,

taxpayer identification number, and the

shareholder’s first taxable year to which

the Protective Statement applies;

(B) The foreign corporation’s name,

address, and taxpayer identification number, if any; and

of each class of stock of the foreign corporation held directly or indirectly by the

shareholder during the shareholder’s first

taxable year to which the Protective Statement applies.

(2) Reasonable belief statement. The

Protective Statement must contain a reasonable belief statement, as described in

paragraph (c)(1) of this section. The reasonable belief statement is a description

of the shareholder’s basis for its reasonable belief that the foreign corporation

was not a PFIC for its taxable year that

ended with or within the shareholder’s

first taxable year to which the Protective

Statement applies. If the Protective Statement applies to a taxable year or years described in paragraph (c)(5)(ii) of this section, the reasonable belief statement must

describe the shareholder’s basis for its

reasonable belief that the foreign corporation was not a PFIC for the foreign corporation’s taxable year or years that ended in

such taxable year or years of the shareholder. The reasonable belief statement

must discuss the application of the income and asset tests to the foreign corporation and the factors, including those

stated in paragraph (d) of this section, that

affect the results of those tests.

(3) Who executes and files the Protective Statement. The person that executes

and files the Protective Statement is the

person that makes the section 1295 election, as provided in § 1.1295–1T(d).

(4) Waiver of the periods of limitations—(i) Time for and manner of extending periods of limitations. (A) In general.

A shareholder that files the Protective

1998–8 I.R.B

Statement with the Commissioner must

extend the periods of limitations on the assessment of all PFIC related taxes for all

of the shareholder’s taxable years to which

the Protective Statement applies, as provided in this paragraph (c)(4). The shareholder is required to execute the waiver on

such form as the Commissioner may prescribe for purposes of this paragraph

(c)(4). Until that form is published, the

shareholder must execute a statement in

which the shareholder agrees to extend the

periods of limitations on the assessment of

taxes for all the shareholder’s taxable

years to which the Protective Statement

applies, as provided in this paragraph

(c)(4), and agrees to the restrictions in

paragraph (c)(4)(ii)(A) of this section.

The shareholder or a person authorized to

sign the shareholder’s federal income tax

return must sign the form or statement. A

properly executed form or statement authorized by this paragraph (c)(4) will be

deemed consented to and signed by a Service Center Director or the Assistant Commissioner (International) for purposes of

§ 301.6501(c)–1(d) of this chapter.

(B) Application of general rule to domestic partnerships—(1) In general. A

domestic partnership that holds an interest

in stock of a PFIC satisfies the waiver requirement of paragraph (c)(4) of this section pursuant to the rules of this paragraph

(c)(4)(i)(B)(1). The partnership must file

one or more waivers obtained or arranged

under this paragraph (c)(4)(i)(B) as part

of the Protective Statement, as provided

in paragraph (c)(1) of this section. The

partnership must either—

(i) Obtain from each partner the partner’s waiver of the periods of limitations;

(ii) Obtain from each partner a duly

executed power of attorney under §

601.501 of this chapter authorizing the

partnership to extend that partner’s periods of limitations, and execute a waiver

on behalf of the partners; or

(iii) In the case of a domestic partnership governed by the unified audit and litigation procedures of sections 6221 through

6233 (TEFRA partnership), arrange for the

tax matters partner (or any other person authorized to enter into an agreement to extend the periods of limitations), as provided in section 6229(b), to execute a

waiver on behalf of all the partners.

(2) Special rules—(i) Addition of

partner to non-TEFRA partnership. In

the case of any individual who becomes a

partner in a domestic partnership other

than a TEFRA partnership (non-TEFRA

partnership) in a taxable year subsequent

to the year in which the partnership filed a

Protective Statement, the partner and the

partnership must comply with the rules

applicable to non-TEFRA partnerships, as

provided in paragraph (c)(4)(i)(B)(1) of

this section, by the due date, as extended,

for the federal income tax return of the

partnership for the taxable year during

which the individual became a partner.

Failure to so comply will render the Protective Statement invalid with respect to

the partnership and partners.

(ii) Change in status from non-TEFRA

partnership to TEFRA partnership. If a

partnership is a non-TEFRA partnership

in one taxable year but becomes a TEFRA

partnership in a subsequent taxable year,

the partnership must file one or more

waivers obtained or arranged under this

paragraph (c)(4)(i)(B)(2)(ii), as part of the

Protective Statement, as provided in paragraph (c)(1) of this section. The partnership must either obtain from any new

partner the partner’s waiver described in

this paragraph (c)(4); obtain from the new

partner a duly executed power of attorney

under § 601.501 of this chapter authorizing the partnership to extend the partner’s

periods of limitations, and execute a

waiver on behalf of the new partner; or

arrange for the tax matters partner (or any

other person authorized to enter into an

agreement to extend the periods of limitations) to execute a waiver on behalf of all

the partners. In each case, the partnership

must attach any new waiver of a partner’s

periods of limitations, and a copy of the

Protective Statement to its federal income

tax return for that taxable year.

domestic estate that holds an interest in

stock of a PFIC satisfies the waiver requirement of this paragraph (c)(4) at the

entity level. For this purpose, such entity

must comply with rules similar to those

applicable to non-TEFRA partnerships, as

provided in paragraph (c)(4)(i)(B)(1) of

this section.

(D) Application of general rule to S

corporations. An S corporation that holds

an interest in stock of a PFIC satisfies the

waiver requirement of this paragraph

February 23, 1998

(c)(4) at the S corporation level. For this

purpose, the S corporation must comply

with rules similar to those applicable to

non-TEFRA partnerships, as provided in

paragraph (c)(4)(i)(B)(1) of this section.

However, in the case of an S corporation

that was governed by the unified audit

corporate proceedings of sections 6241

through 6245 for any taxable year to

which a Protective Statement applies (former TEFRA S corporation), the tax matters person (or any other person authorized to enter into such an agreement), as

was provided in sections 6241 through

6245, may execute a waiver described in

this paragraph (c)(4) that applies to such

taxable year; for any other taxable year,

the former TEFRA S corporation must

comply with rules similar to those applicable to non-TEFRA partnerships.

(E) Effect on waiver of complete termination of a pass through entity or pass

through entity’s business. The complete

termination of a pass through entity described in paragraphs (c)(4)(i)(B) through

(D) of this section, or a pass through entity’s trade or business, will not terminate

a waiver that applies to a partner, shareholder, or beneficiary.

(F) Application of general rule to foreign partnerships, foreign trusts, domestic or foreign grantor trusts, and foreign

estates. A U.S. person that is a partner or

beneficiary of a foreign partnership, foreign trust, or foreign estate that holds an

interest in stock of a PFIC satisfies the

waiver requirement of this paragraph

(c)(4) at the partner or beneficiary level.

A U.S. person that is treated under sections 671 through 679 as the owner of the

portion of a domestic or foreign trust that

owns an interest in PFIC stock also satisfies the waiver requirement at the owner

level. A waiver by a partner or beneficiary applies only to that partner or beneficiary, and is not affected by a complete

termination of the entity or the entity’s

trade or business.

(ii) Terms of waiver—(A) Scope of

waiver. The waiver of the periods of limitations is limited to the assessment of

PFIC related taxes. If the period of limitations for a taxable year affected by a

retroactive election has expired with respect to the assessment of other non-PFIC

related taxes, no adjustments, other than

consequential changes, may be made by

the Internal Revenue Service or by the

February 23, 1998

shareholder to any other items of income,

deduction, or credit for that year. If the

period of limitations for refunds or credits

for a taxable year affected bya retroactive

election is open only by virtue of the assessment period extension and section

6511(c), no refund or credit is allowable

on grounds other than adjustments to

PFIC related taxes and consequential

changes.

(B) Period of waiver. The extension of

the periods of limitations on the assessment of PFIC related taxes will be effective for all of the shareholder’s taxable

years to which the Protective Statement

applies. In addition, the waiver, to the extent it applies to the period of limitations

for a particular year, will terminate with

respect to that year no sooner than three

years from the date on which the shareholder files an amended return, as provided in paragraph (g) of this section, for

that year. For the suspension of the running of the period of limitations for the

collection of taxes for which a shareholder has elected under section 1294 to

extend the time for payment, as provided

in paragraph (g)(3)(ii) of this section, see

sections 6503(i) and 6229(h).

(5) Time for and manner of filing a

Protective Statement—(i) In general.

Except as provided in paragraph (c)(5)(ii)

of this section, a Protective Statement

must be attached to the shareholder’s federal income tax return for the shareholder’s first taxable year to which the

Protective Statement will apply. The

shareholder also must file a copy of the

Protective Statement with the Philadelphia Service Center, P.O. 21086, Philadelphia, PA 19114. The shareholder must

file its return and the copy of the Protective Statement by the due date, as extended, for the return.

(ii) Special rule for taxable years

ended before January 2, 1998. A shareholder may file a Protective Statement that

applies to the shareholder’s taxable year or

years that ended before January 2, 1998,

provided the period of limitations on the

assessment of taxes for any such year has

not expired (open year). The shareholder

must file the Protective Statement applicable to such open year or years, as provided

in paragraph (c)(5)(i) of this section, by

the due date, as extended, for the shareholder’s return for the first taxable year

ending after January 2, 1998.

(6) Applicability of the Protective

Statement—(i) In general. Except as

otherwise provided in this paragraph

(c)(6), a Protective Statement applies to

the shareholder’s first taxable year for

which the Protective Statement was filed

and to each subsequent taxable year. The

Protective Statement will not apply to any

taxable year of the shareholder during

which the shareholder does not own any

stock of the foreign corporation or to any

taxable year thereafter. Accordingly, if

the shareholder has not made a retroactive

election with respect to the previously

owned stock by the time the shareholder

reacquires stock of the foreign corporation, the shareholder must file another

Protective Statement to preserve its right

to make a retroactive election with respect

to the later acquired stock. For the rule

that provides that a section 1295 election

made with respect to a foreign corporation applies to stock of that corporation

acquired after a lapse in ownership, see

§ 1.1295–1T(c)(2)(iii).

(ii) Invalidity of the Protective Statement. A shareholder will be treated as if it

never filed a Protective Statement if—

(A) The shareholder failed to make a

retroactive election by the date prescribed

for making the retroactive election in

paragraph (g)(1) of this section; or

(B) The waiver of the periods of limitations terminates (by reason of a court

decision or other determination) with respect to any taxable year before the expiration of three years from the date of filing of an amended return for that year

pursuant to paragraph (g) of this section.

(7) Retention of Protective Statement

and information demonstrating reasonable belief. A shareholder that files a Protective Statement must retain a copy of

the Protective Statement and its attachments and must, for each taxable year of

the shareholder to which the Protective

Statement applies, retain information sufficient to demonstrate the shareholder’s

reasonable belief that the foreign corporation was not a PFIC for the taxable year of

the foreign corporation ending during

each such taxable year of the shareholder.

(d) Reasonable belief—(1) In general.

A foreign corporation is a PFIC for a taxable year if the foreign corporation satisfies either the income or asset test of section 1296(a). To determine whether a

shareholder had reasonable belief that the

1998–8 I.R.B.

foreign corporation is not a PFIC under

section 1296(a), the shareholder must

consider all relevant facts and circumstances. Reasonable belief may be based

on a variety of factors, including reasonable asset valuations as well as reasonable

interpretations of the applicable provisions of the Code, regulations, and administrative guidance regarding the direct or

indirect ownership of the income or assets

of the foreign corporation, the proper

character of that income or those assets,

and similar issues. Reasonable belief

may be based on reasonable predictions

regarding income to be earned and assets

to be owned in subsequent years where

qualification of the foreign corporation as

a PFIC for the current taxable year will

depend on the qualification of the corporation as a PFIC in a subsequent year.

Reasonable belief may be based on an

analysis of generally available financial

information of the foreign corporation.

To determine whether a shareholder had

reasonable belief that the foreign corporation was not a PFIC, the Commissioner

may consider the size of the shareholder’s

interest in the foreign corporation.

(2) Knowledge of law required. Reasonable belief must be based on a good

faith effort to apply the Code, regulations,

and related administrative guidance. Any

person’s failure to know or apply these

provisions will not form the basis of reasonable belief.

(e) Special rules for qualified shareholders—(1) In general. A shareholder

that is a qualified shareholder, as defined

in paragraph (e)(2) of this section, for a

taxable year of the shareholder is not required to satisfy the reasonable belief requirement of paragraph (b)(1) of this section or file a Protective Statement to

preserve its ability to make a retroactive

election with respect to such taxable year.

Accordingly, a qualified shareholder may

make a retroactive election for any open

taxable year in the shareholder’s holding

period. The retroactive election will be

treated as made in the earliest taxable year

of the shareholder during which the foreign corporation qualified as a PFIC (including a taxable year ending prior January 2, 1998) and the shareholder will be

treated as a shareholder of a pedigreed

QEF, as defined in § 1.1291–9(j)(2)(ii),

provided the shareholder—

1998–8 I.R.B

(i) Has been a qualified shareholder

with respect to the foreign corporation for

all taxable years of the shareholder included in the shareholder’s holding period

during which the foreign corporation was

a PFIC, or in the case of taxable years

ending before January 2, 1998, the shareholder satisfies the criteria of a qualified

shareholder, for all such years; or

(ii) Has been a qualified shareholder,

or in the case of taxable years ending before January 2, 1998, satisfies the criteria

of a qualified shareholder, for all taxable

years in its holding period before it filed a

Protective Statement, which Protective

Statement is applicable to all subsequent

years, beginning with the first taxable

year in which the shareholder is not a

qualified shareholder.

(2) Qualified shareholder. A shareholder will be treated as a qualified shareholder for a taxable year if the shareholder did not file a Protective Statement

applicable to an earlier taxable year included in the shareholder’s holding period

of the stock of the foreign corporation

currently held and—

(i) At all times during the taxable year

the shareholder owned, within the meaning of section 958, directly, indirectly, or

constructively, less than two percent of

the vote and value of each class of stock

of the foreign corporation; and

(ii) With respect to the taxable year of

the foreign corporation ending within the

shareholder’s taxable year, the foreign

corporation or U.S. counsel for the foreign corporation indicated in a public filing, disclosure statement or other notice

provided to U.S. persons that are shareholders of the foreign corporation (corporate filing) that the foreign corporation—

(A) Reasonably believes that it is not

or should not constitute a PFIC for the

corporation’s taxable year; or

(B) Is unable to conclude that it is not

or should not be a PFIC (due to certain

asset valuation or interpretation issues, or

because PFIC status will depend on the

income or assets of the foreign corporation in the corporation’s subsequent taxable years) but reasonably believes that,

more likely than not, it ultimately will not

be a PFIC.

(3) Exceptions. Notwithstanding paragraph (e)(2)(ii) of this section, a shareholder will not be treated as a qualified

shareholder for a taxable year of the

shareholder if the shareholder knew or

had reason to know that a corporate filing

regarding the foreign corporation’s PFIC

status was inaccurate, or knew that the

foreign corporation was a PFIC for the

taxable year of the foreign corporation

ending with or within such taxable year of

the shareholder. For purposes of this

paragraph, a shareholder will be treated as

knowing that a foreign corporation was a

PFIC if the principal activity of the foreign corporation, directly or indirectly, is

owning or trading a diversified portfolio

of stock, securities, or other financial contracts.

(f) Special consent—(1) In general. A

shareholder that has not satisfied the requirements of paragraph (b) or (e) of this

section may request the consent of the

Commissioner to make a retroactive election for a taxable year of the shareholder

provided the shareholder satisfies the requirements set forth in this paragraph (f).

The Commissioner will grant relief under

this paragraph (f) only if—

(i) The shareholder reasonably relied on

a qualified tax professional, within the

meaning of paragraph (f)(2) of this section;

(ii) Granting consent will not prejudice

the interests of the United States government, as provided in paragraph (f)(3) of

this section;

(iii) The shareholder requests consent

under paragraph (f) of this section before

a representative of the Internal Revenue

Service raises upon audit the PFIC status

of the corporation for any taxable year of

the shareholder; and

(iv) The shareholder satisfies the procedural requirements set forth in paragraph (f)(4) of this section.

(2) Reasonable reliance on a qualified

tax professional—(i) In general. Except

as provided in paragraph (f)(2)(ii) of this

section, a shareholder is deemed to have

reasonably relied on a qualified tax professional only if the shareholder reasonably relied on a qualified tax professional

(including a tax professional employed by

the shareholder) who failed to identify the

foreign corporation as a PFIC or failed to

advise the shareholder of the consequences of making, or failing to make, the

section 1295 election. A shareholder will

not be considered to have reasonably relied on a qualified tax professional if the

February 23, 1998

shareholder knew, or reasonably should

have known, that the foreign corporation

was a PFIC and the availability of a section 1295 election, or knew or reasonably

should have known that the qualified tax

professional—

(A) Was not competent to render tax

advice with respect to the ownership of

shares of a foreign corporation; or

(B) Did not have access to all relevant

facts and circumstances.

(ii) Shareholder deemed to have not

reasonably relied on a qualified tax professional. For purposes of this paragraph

(f)(2), a shareholder is deemed to have

not reasonably relied on a qualified tax

professional if the shareholder was informed by the qualified tax professional

that the foreign corporation was a PFIC

and of the availability of the section 1295

election and related tax consequences, but

either chose not to make the section 1295

election or was unable to make a valid

section 1295 election.

(3) Prejudice to the interests of the

United States government—(i) General

rule. Except as otherwise provided in

paragraph (f)(3)(ii) of this section, the

Commissioner will not grant consent

under paragraph (f) of this section if

doing so would prejudice the interests of

the United States government. The interests of the United States government are

prejudiced if granting relief would result

in the shareholder having a lower tax liability, taking into account applicable interest charges, in the aggregate for all

years affected by the retroactive election

(other than by a de minimis amount) than

the shareholder would have had if the

shareholder had made the section 1295

election by the election due date. The

time value of money is taken into account

for purposes of this computation.

(ii) Elimination of prejudice to the interests of the United States government.

Notwithstanding the general rule of paragraph (f)(3)(i) of this section, if granting

relief would prejudice the interests of the

United States government, the Commissioner may, in the Commissioner’s sole

discretion, grant consent to make the election provided the shareholder enters into a

closing agreement with the Commissioner

that requires the shareholder to pay an

amount sufficient to eliminate any prejudice to the United States government as a

consequence of the shareholder’s inability

February 23, 1998

to file amended returns for closed taxable

years.

(4) Procedural requirements—(i) Filing instructions. A shareholder requests

consent under paragraph (f) of this section

to make a retroactive election by filing

with the Office of the Associate Chief

Counsel (International) a ruling request

that includes the affidavits required by

this paragraph (f)(4). The ruling request

must satisfy the requirements, including

payment of the user fee, for ruling requests filed with that office.

(ii) Affidavit from shareholder. The

shareholder, or a person authorized to

sign a federal income tax return on behalf

of the shareholder, must submit a detailed

affidavit describing the events that led to

the failure to make a section 1295 election

by the election due date, and to the discovery thereof. The shareholder’s affidavit must describe the engagement and

responsibilities of the qualified tax professional as well as the extent to which

the shareholder relied on the tax professional. The shareholder must sign the affidavit under penalties of perjury. An individual who signs for an entity must

have personal knowledge of the facts and

circumstances at issue.

(iii) Affidavits from other persons. The

shareholder must submit detailed affidavits from individuals having knowledge

or information about the events that led to

the failure to make a section 1295 election

by the election due date, and to the discovery thereof. These individuals must

include the qualified tax professional

upon whose advice the shareholder relied,

as well as any individual (including an

employee of the shareholder) who made a

substantial contribution to the return’s

preparation, and any accountant or attorney, knowledgeable in tax matters, who

advised the shareholder with regard to its

ownership of the stock of the foreign corporation. Each affidavit must describe the

individual’s engagement and responsibilities as well as the advice concerning the

tax treatment of the foreign corporation

that the individual provided to the shareholder. Each affidavit also must include

the individual’s name, address, and taxpayer identification number, and must be

signed by the individual under penalties

of perjury.

(iv) Other information. In connection

with a request for consent under this para-

graph (f), a shareholder must provide any

additional information requested by the

Commissioner.

(v) Notification of Internal Revenue

Service. The shareholder must notify the

branch of the Associate Chief Counsel

(International) considering the request for

relief under this paragraph (f) if, while the

shareholder’s request for consent is pending, the Internal Revenue Service begins

an examination ofthe shareholder’s return

for the retroactive election year or for any

subsequent taxable year during which the

shareholder holds stock of the foreign

corporation.

(vi) Who requests special consent

under this paragraph (f) and who enters

into a closing agreement. The person that

requests consent under this paragraph (f)

is the person that makes the section 1295

election, as provided in § 1.1295–1T(d).

If a shareholder is required to enter into a

closing agreement with the Commissioner, as described in paragraph (f)(3)(ii)

of this section, rules similar to those

under paragraphs (c)(4)(i)(B) through (E)

of this section apply for purposes of determining the person that enters into the

closing agreement.

(g) Time for and manner of making a

retroactive election—(1) Time for making a retroactive election—(i) In general.

Except as otherwise provided in paragraph (g)(1)(ii) of this section, a shareholder must make a retroactive election,

in the manner provided in paragraph

(g)(2) of this section, on or before the due

date, as extended, for the shareholder’s

return—

(A) In the case of a shareholder that

makes a retroactive election pursuant to

paragraph (b) or (e) of this section, for the

taxable year in which the shareholder determines or reasonably should have determined that the foreign corporation was a

PFIC; or

(B) In the case of a shareholder that

obtains the consent of the Commissioner

pursuant to paragraph (f) of this

section,for the taxable year in which such

consent is granted.

(ii) Transition rule. A shareholder that

files a Protective Statement for a taxable

year described in paragraph (c)(5)(ii) of

this section may make a retroactive election by the due date, as extended, for the

return for the first taxable year ended after

January 2, 1998, even if the shareholder

1998–8 I.R.B.

determined or should have determined

that the foreign corporation was a PFIC

for a year described in paragraph (c)(5)(ii)

of this section at any time on or before

January 2, 1998.

(iii) Ownership not required at time

retroactive election is made. The shareholder need not own shares of the foreign

corporation at the time the shareholder

makes a retroactive election with respect

to the foreign corporation.

(2) Manner of making a retroactive

election. A shareholder that has satisfied

the requirements of paragraph (b) or (e) of

this section, or a shareholder that has been

granted consent under paragraph (f) of this

section, must make a retroactive election

in the manner provided in Form 8621 for

making a section 1295 election, and must

attach Form 8621 to an amended return for

the later of the retroactive election year or

the earliest open taxable year of the shareholder. The shareholder also must file an

amended return for each of its subsequent

taxable years affected by the retroactive

election. In each amended return the

shareholder must redetermine its income

tax liability for that year to take into account the assessment of PFIC related

taxes. If the period of limitations for the

assessment of taxes for a taxable year affected by the retroactive election has expired except to the extent the waiver of

limitations, described in paragraph (c)(4)

of this section, has extended such period,

no adjustments, other than consequential

changes, may be made to any other items

of income, deduction, or credit in that year.

In addition, the shareholder must pay all

taxes and interest owing by reason of the

PFIC and QEF status of the foreign corporation in those years (except to the extent a

section 1294 election extends the time to

pay the taxes and interest). A shareholder

that filed a Protective Statement must attach to Form 8621 filed with each

amended return a representation that the

shareholder, until the taxable year in which

it determined or reasonably should have

determined that the foreign corporation

was a PFIC, reasonably believed, within

the meaning of paragraph (d) of this section, that the foreign corporation was not a

PFIC in the taxable year for which the

amended return is filed, and in all other

taxable years to which the Protective Statement applies. A shareholder that entered

into a closing agreement must comply with

1998–8 I.R.B

the terms of that agreement, as provided in

paragraph (f)(3)(ii) of this section, to eliminate any prejudice to the United States

government’s interests, as described in

paragraph (f)(3) of this section.

(3) Who makes the retroactive election.

The person that makes the retroactive

election is the person that makes the section 1295 election, as provided in

§ 1.1295–1T(d). A partner, shareholder,

or beneficiary for which a pass through

entity, as described in paragraphs

(c)(4)(i)(B) through (D) of this section,

filed a Protective Statement may make a

retroactive election, if the pass through

entity completely terminates its business

or otherwise ceases to exist.

(4) Other elections—(i) Section

1291(d)(2) election. If the foreign corporation for which the shareholder makes a

retroactive election will be treated as an

unpedigreed QEF, as defined in § 1.1291–

9(j)(2)(iii), with respect to the shareholder, the shareholder may make an election under section 1291(d)(2) to purge its

holding period of the years or parts of

years before the effective date of the

retroactive election. If the qualification

date, within the meaning of § 1.1291–9(e)

or 1.1291–10(e), falls in a taxable year for

which the period of limitations has expired, the shareholder may treat the first

day of the retroactive election year as the

qualification date. The shareholder may

make a section 1291(d)(2) election at the

time that it makes the retroactive election,

but no later than two years after the date

that the amended return in which the

retroactive election is made is filed. For

the requirements for making a section

1291(d)(2) election, see §§ 1.1291–9 and

1.1291–10.

(ii) Section 1294 election. A shareholder may make an election under section 1294 to extend the time for payment

of tax on the shareholder’s pro rata shares

of the ordinary earnings and net capital

gain of the foreign corporation reported in

the shareholder’s amended return, and

section 6621 interest attributable to such

tax, but only to the extent the tax and interest are attributable to earnings that

have not been distributed to the shareholder. The shareholder must make a section 1294 election for a taxable year at the

time that it files its amended return for

that year, as provided in paragraph (g)(1)

of this section. For the requirements for

making a section 1294 election, see

§ 1.1294–1T.

(h) Effective date. The rules of this

section are effective as of January 2,

1998.

Par. 13. Section 1.1297–3T(c) is added

to read as follows:

§ 1.1297–3T Deemed sale election by a

United States person that is a

shareholder of a passive foreign

investment company (temporary).

election rules—(1) In general. A shareholder of a former PFIC, within the meaning of § 1.1291–9(j)(2)(iv), that was a controlled foreign corporation, within the

meaning of section 957(a) (CFC), during

its last taxable year as a PFIC under section

1296(a), may apply the rules of section

1291(d)(2)(B) and § 1.1291–9 to an election under section 1297(b)(1) and this section made by the time and in the manner

provided in paragraph (b) of this section.

(2) Transition rule. If the time for

making an election under this section, as

provided in paragraph (b) of this section,

expired before January 2, 1998, a shareholder that applied rules similar to the

rules of section 1291(d)(2)(A) and

§ 1.1291–10 to an election under this section made with respect to a corporation

that was a CFC during its last taxable year

as a PFIC under section 1296(a) may file

an amended return for the taxable year

that includes the termination date, as defined in paragraph (a) of this section, and

apply the rules of section 1291(d)(2)(B)

and § 1.1291–9 at any time before the expiration of the period of limitations for the

assessment of taxes for that taxable year.

(3) Effective date. The rules of this paragraph are effective as of January 2, 1998.

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 14. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

§602.101 [Amended]

Par. 15. In § 602.101, paragraph (c) is

amended by adding entries in numerical

order to the table to read as follows:

February 23, 1998

§ 602.101 OMB Control numbers.

CFR part or section

where identified

and described

Current OMB

Control No.

1.1295–1T . . . . . . . . . . . . . . .1545–1555

1.1295–3T . . . . . . . . . . . . . . .1545–1555

changes made by the Omnibus Budget

Reconciliation Act of 1993 and the Small

Business Job Protection Act of 1996.

They affect certain enterers, refiners, retailers, terminal operators, throughputters,

wholesale distributors, and users.

DATES: These regulations are effective

January 2, 1998. For dates of applicability of these regulations, see §§48.4082–5

(h) and 48.6715–1(a)(3).

FOR FURTHER INFORMATION CONTACT: Frank Boland (202) 622–3130

(not a toll-free call).

SUPPLEMENTARY INFORMATION:

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

Approved December 15, 1997.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

December 31, 1997, 8:45 a.m., and published in the

issue of the Federal Register for January 2, 1998, 63

F.R. 6)

Section 4081.—Imposition of

Tax

26 CFR 48.4081–1: Taxable fuel; definitions.

T.D. 8748

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 40 and 48

Gasoline and Diesel Fuel Excise

Tax; Special Rules for Alaska;

Definitions

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations relating to the application of the diesel fuel excise tax to fuel

used in Alaska. This document also contains final regulations relating to the gasoline and diesel fuel excise tax definitions.

The regulations implement certain

February 23, 1998

Background

Section 4081 imposes a tax on certain

removals, entries, and sales of diesel fuel.

However, under section 4082, tax is not

imposed if, among other conditions, the

diesel fuel is indelibly dyed in accordance

with Treasury regulations. Section 1801

of the Small Business Job Protection Act

of 1996 amends section 4082 to create an

exception to the dyeing requirement that

effectively applies only to diesel fuel that

is removed, entered, or sold in Alaska.

Temporary regulations (T.D. 8693

[1997–1 C.B. 192]) relating to this change

were published in the Federal Register on

December 17, 1996 (61 F.R. 66215) along

with a notice of proposed rulemaking

(REG–247678–96 [1997–1 C.B. 787])

cross-referencing the temporary regulations (61 F.R. 66246). The notice of proposed rulemaking also proposed other

changes to the gasoline and diesel fuel excise tax regulations that were not contained in the temporary regulations.

A public hearing was neither requested

nor held. After consideration of written

comments, the proposed regulations are

adopted as revised by this Treasury decision. Comments and revisions are discussed below.

Explanation of Provisions

The proposed regulations provide a definition of kerosene for purposes of the

diesel fuel tax. Several commentators

questioned this proposal. Because the

IRS is continuing its review of this issue,

the final regulations do not define

kerosene. However, a definition may be

included in a future Treasury decision.

The proposed regulations also include

changes to the effective date of other proposed regulations that were published in

the Federal Register on March 14, 1996

(61 F.R. 10490). Those regulations propose requirements relating to dye injection equipment and are not being finalized

at this time. However, the IRS appreciates the concern expressed by several

commentators that, as revised, the proposed effective dates still would not give

taxpayers sufficient time to comply with

the proposed requirements. Thus, the

final dye injection regulations will provide a longer period of time between the

publication date and the effective date

than was proposed.

In response to comments, these final

regulations modify the definition of terminal to exclude an otherwise qualifying

facility that stores only taxed gasoline and

taxed, undyed diesel fuel. As a result of

this modification, tax will not be imposed

again when the fuel is removed from this

type of facility.

The final regulations generally adopt as

proposed the provisions dealing with

diesel fuel that is removed, entered, or

sold in Alaska. However, several comments suggested that the definition of

qualified dealer in the proposed regulations was too narrow and prevented unlicensed vendors from selling diesel fuel

for exempt uses. In response, the final

regulations expand the definition of qualified dealer to include unlicensed diesel

fuel retailers that are registered by the IRS

under specified conditions. As a result of

this modification, many retailers that

serve remote communities in Alaska will

be able to buy diesel fuel tax free for resale for nontaxable uses.

The final regulations also make minor

modifications to existing gasoline and

diesel fuel regulations. For example, existing regulations generally require gasoline and diesel fuel refund claims to be

filed with the same service center where

the claimant’s income tax return is filed.

Because all excise tax refund claims are

now processed at the Cincinnati Service

Center, this regulatory provision is removed.

Special Analyses

It has been determined that this Treasury decision is not a significant regula-

1998–8 I.R.B.

tory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not

apply to these regulations and, because

these regulations do not impose a collection of information on small entities, the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Therefore, a

Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the

Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel

for Advocacy of the Small Business Administration for comment on its impact on

small business.

Par. 4. Section 48.4081–1 is amended

as follows:

1. Paragraph (b) is amended by:

a. Adding a definition in alphabetical

order; and

b. Revising the definition of terminal.

2. Paragraph (c)(1)(i) is amended by

removing the language “any mixture” and

adding “any taxable fuel” in its place and

by removing the language “and that consists of” and adding “by mixing” in its

place.

3. Paragraph (d) is revised.

The addition and revisions read as follows:

Drafting Information

(b) * * *

Aviation gasoline means all special

grades of gasoline that are suitable for use

in aviation reciprocating engines, as described in ASTM Specification D 910 and

Military Specification MIL–G–5572. The

ASTM specification may be obtained

from the American Society for Testing

and Materials and the military specification from the Standardization Document

Order Desk at the addresses provided in

paragraph (c)(2)(i) of this section.

The principal author of these regulations is Frank Boland, Office of Assistant

Chief Counsel (Passthroughs and Special

Industries). However, other personnel

from the IRS and Treasury Department

participated in their development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 40 and 48

are amended as follows:

§48.4081–1 Taxable fuel; definitions.

PART 48—MANUFACTURERS AND

RETAILERS EXCISE TAXES

* * * * *

Terminal means a taxable fuel storage

and distribution facility that is supplied by

pipeline or vessel and from which taxable

fuel may be removed at a rack. However,

the term does not include any facility at

which gasoline blendstocks are used in

the manufacture of products other than

finished gasoline and from which no

gasoline is removed. Also, effective January 2, 1998, the term does not include

any facility operated by a taxable fuel registrant if all of the finished gasoline and

diesel fuel (other than diesel fuel dyed in

accordance with §48.4082–1(b)) stored at

the facility has been previously taxed

under section 4081 upon removal from a

refinery or terminal.

Par. 3. The authority citation for part

48 is amended by removing the entry for

§48.4082–5T and adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 48.4082–5 also issued under 26

U.S.C. 4082. * * *

* * * * *

(d) Effective date. This section is applicable January 1, 1994, except that in

paragraph (b) of this section the definition

of aviation gasoline and the third sentence

in the definition of terminal are effective

January 2, 1998.

PART 40—EXCISE TAX

PROCEDURAL REGULATIONS

Paragraph 1. The authority citation for

part 40 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

§40.6011(a)–1 [Amended]

Par. 2. Section 40.6011(a)–1(b)(2)(vi)

is amended by removing the language “a

taxable fuel registrant” and adding “registered under section 4101” in its place.

1998–8 I.R.B

§48.4082–5T [Redesignated as

§48.4082–5]

Par. 5. Section 48.4082–5T is redesignated as §48.4082–5 and the language

“(temporary)” is removed from the section heading.

Par. 6. Section 48.4082–5, as redesignated, is amended as follows:

1. Paragraph (b) is amended by revising the definition of qualified dealer.

2. Paragraphs (f) and (g) are redesignated as paragraphs (g) and (h), respectively.

3. A new paragraph (f) is added.

4. Paragraph (h), as redesignated, is revised.

The addition and revisions read as follows:

§48.4082–5 Diesel fuel; Alaska

(b) * * *

Qualified dealer means any person that

holds a qualified dealer license from the

state of Alaska or has been registered by

the district director as a qualified retailer.

The district director will register a person

as a qualified retailer only if the district

director—

(1) Determines that the person, in the

course of its trade or business, regularly

sells diesel fuel for use by its buyer in a

nontaxable use; and

(2) Is satisfied with the filing, deposit,

payment, and claim history for all federal

taxes of the person and any related person.

(f) Registration. With respect to each

person that has been registered as a qualified retailer by the district director, the

rules of §48.4101–1(g), (h), and (i) apply.

(h) Effective date. This section is applicable with respect to diesel fuel removed or

entered after December 31, 1996. A person

registered by the district director as a qualified retailer before April 2, 1998, may be

treated, to the extent the district director determines appropriate, as a qualified dealer

for the period before that date.

§48.6416(b)(4)–1 [Removed]

Par. 7. Section 48.6416(b)(4)–1 is removed.

February 23, 1998

§48.6421–3 [Amended]

Par. 8. In §48.6421–3, paragraph (d)(2)

is amended by removing the last sentence.

§48.6427–3 [Amended]

Par. 9. In §48.6427–3, paragraph (d)(2)

is amended by removing the last sentence.

Par. 10. In §48.6715–1, paragraph

(a)(3) is revised to read as follows:

(a) * * *

(3) The alteration or attempted alteration occurs in an exempt area of Alaska

after September 30, 1996.

§48.6715–2T [Removed]

Par. 11. Section 48.6715–2T is removed.

Approved November 6, 1997.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

December 31, 1997, 8:45 a.m., and published in the

issue of the Federal Register for January 2, 1998, 63

F.R. 24)

§48.6715–1 Penalty for misuse of dyed

diesel fuel.

February 23, 1998

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

1998–8 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Order of Applying Federal Tax

Deposits

Notice 98–14

PURPOSE

This notice provides an interim procedure that taxpayers may use to request

abatement of the failure-to-deposit

penalty imposed by § 6656 of the Internal

Revenue Code when the manner in which

the Internal Revenue Service applies deposits, as set forth in Rev. Proc. 90–58,

1990–2 C.B. 642, produces multiple failure-to-deposit penalties as a result of a

single failure to deposit.

BACKGROUND

Section 6656 provides that in the case

of any failure by any person to deposit (as

required by the Code or regulations) on

the date prescribed therefor any amount

of tax in a government depository, unless

it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be imposed upon such

person a penalty equal to the applicable

percentage of the amount of the underpayment. The penalty ranges from 2 to

15 percent depending upon the lateness of

the deposit.

Rev. Proc. 90–58, effective for deposit

liability periods beginning after March

31, 1991, provides that deposits will be

applied in date-made order against deposit liabilities in due-date order. Thus, a

deposit will be applied first to satisfy the

oldest past due underdeposits within the

same return period. Other credits to the

taxpayer’s account, such as an overpayment from the previous return period, will

be similarly applied.

Rev. Proc. 90–58 was issued as a result

of changes made to the failure-to-deposit

penalty under § 6656 by the Revenue

Reconciliation Act of 1989, Pub. L. No.

101–239, 1990–1 C.B. 210, under which

the penalty changed from a flat-rate 10

percent penalty to a time-sensitive

penalty.

The rationale underlying Rev. Proc.

90–58 is that it is generally in the best interests of depositors that strive to be compliant to have the oldest deposit liability

1998–8 I.R.B

in the return period satisfied first, thus

preventing the penalty rate on that underdeposit from escalating. However, if a

depositor inadvertently misses a deposit

early in a return period but makes all succeeding deposits on a timely basis, the result can be multiple failure-to-deposit

penalties.

INTERIM RELIEF PROCEDURE

Any taxpayer that receives multiple

failure-to-deposit penalty notices as a result of a single failure to deposit, may call

the toll-free number shown on the penalty

notice. The Service will, if it deems appropriate, reduce the multiple penalty to

the penalty amount due on the missed deposit with respect to return periods beginning after December 31, 1997.

COMMENTS INVITED

The Service intends to provide more

specific published guidance on this matter, and requests comments on the

methodology this guidance should set

forth. Comments should be submitted by

April 30, 1998 to: Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044, Attn:

CC:DOM:CORP:R (IT&A Branch 4),

Room 5226. Submissions may be handdelivered between the hours of 8 a.m. and

5 p.m. to: Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave, NW,

Washington, DC, Attn: CC:DOM:CORP:R

(IT&A Branch 4), Room 5226. Alternatively, taxpayers may submit comments

electronically at

http://www.irs.ustreas.gov/prod/tax_

regs/comments.html

(the Service’s internet site). All comments submitted will be available for public inspection and copying.

DRAFTING INFORMATION

The principal author of this notice is

Vincent G. Surabian of the Office of the

Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this notice, contact Mr. Surabian

at (202) 622-4940 (not a toll-free call).

26 CFR 601.201: Rulings and determination

letters.

Rev. Proc. 98–21

SECTION 1. PURPOSE

This revenue procedure sets forth the

procedures concerning requests to the

U.S. competent authority for assistance in

resolving cases under Article XIII(8) of

the Convention Between the United

States of America and Canada with respect to Taxes on Income and Capital,

dated September 26, 1980, as amended by

the Protocols dated June 14, 1983, March

28, 1984, March 17, 1995, and July 29,

1997 (“the Treaty”), 1986–2 C.B. 258.

Article XIII(8) of the Treaty permits taxpayers to request the competent authority

to defer the recognition of profit, gain, or

income with respect to property alienated

in the course of a corporate or other organization, reorganization, or similar transaction. See also Rev. Proc. 96–13, 1996–

1 C.B. 616, for an updated discussion of

the general procedures concerning requests by taxpayers for assistance of the

U.S. competent authority under the provisions of an income, estate, or gift tax

treaty to which the United States is a

party.

SEC. 2. SCOPE

.01 General. The U.S. competent authority assists taxpayers concerning matters covered in the mutual agreement provisions of tax treaties in the manner

specified in those provisions. A tax treaty

generally permits taxpayers to request

competent authority assistance when they

consider that the actions of the United

States, a treaty partner, or both, result, or

will result, in taxation that is contrary to

the provisions of the treaty. Competent

authority matters are a government-togovernment activity that does not include

the taxpayer’s participation.

.02 Requests for Assistance. In general, all requests for competent authority

assistance must be in accordance with

Rev. Proc. 96–13. However, to the extent

that this revenue procedure provides additional or inconsistent procedures from

those set forth in Rev. Proc. 96–13, the

February 23, 1998

procedures set forth in this revenue procedure must be followed when requesting

competent authority assistance under Article XIII(8) of the Treaty.

.03 U.S. Competent Authority. The

Assistant Commissioner (International)

acts as the U.S. competent authority in administering the operative provisions of

tax treaties (including Article XIII(8) of

the Treaty) and in interpreting and applying these treaties. In interpreting or applying these tax treaties, the Assistant

Commissioner (International) acts only

with the concurrence of the Associate

Chief Counsel (International). See Delegation Order No. 114 (Rev. 10), Effective

date: June 2, 1994.

SEC. 3. BACKGROUND

.01 General. Article XIII(8) of the

Treaty, as revised by the Protocol of

March 17, 1995, provides that:

“Where a resident of a Contracting

State alienates property in the course of a

corporate or other organization, reorganization, amalgamation, division or similar

transaction and profit, gain, or income

with respect to such alienation is not recognized for the purpose of taxation in that

State, if requested to do so by the person

who acquires the property, the competent

authority of the other Contracting State

may agree, in order to avoid double taxation and subject to terms and conditions

satisfactory to such competent authority,

to defer the recognition of the profit, gain,

or income with respect to such property

for the purpose of taxation in that other

State until such time and in such manner

as may be stipulated in the agreement.”

.02 Purpose of this Provision. The

purpose of Article XIII(8) of the Treaty is

to coordinate the U.S. and Canadian nonrecognition rules concerning corporate

and other organizations, reorganizations,

amalgamations, divisions, and similar

transactions in order to avoid double taxation of gain from the alienation of property in the United States and Canada.

SEC. 4. GENERAL CONDITIONS

UNDER WHICH THIS PROCEDURE

APPLIES

.01 General. The assistance of the competent authority is entirely discretionary.

.02 Types of Assistance. In connection

with Article XIII(8) of the Treaty, the U.S.

February 23, 1998

competent authority handles two types of

requests for relief:

(a) requests by Canadian transferees of

property for relief from U.S. taxation, and

(b) requests by Revenue Canada for verification of the U.S. tax treatment of transactions of U.S. transferees of property.

.03 Transactions Subject to U.S. Taxation but not Subject to Canadian Tax

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